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Commodities 2021: Australian wheat to weather China trade concerns on expected bumper harvest

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Singapore — Optimism from an anticipated record Australian wheat crop, estimated to be the country's second-largest, is likely to outweigh trade concerns from troubled Australia-China relations in the first half of 2021.

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Australia's wheat market is set to welcome the new year with a positive outlook as cargoes are priced to attract ample export demand.

Despite price pressures from prospects of an improvement in wheat production, Australia has benefited from the recent rally in Russian wheat prices, which was driven by dry weather conditions and wheat export restrictions.

Nonetheless, Australia faces some risks in 2021, particularly logistical challenges from handling a huge 31.2 million mt wheat crop and the volatile Australian dollar.

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Regaining, expanding market share

The La Nina weather phenomenon has pulled Australia out of three consecutive drought years, while Argentina has suffered heavily from a winter drought, paving the way for Australia to dislodge Argentina from the southeast Asian wheat market in Q1 2021.

Since June 2020, Australia has won most of the business in Thailand and the Philippines for its new crop feed wheat -- two markets that are pure price buyers, indifferent to the origin of the feed wheat.

At least 750,000 mt of Australian feed wheat has been booked to-date for December 2020-April 2021 shipment to Thailand and the Philippines, 57% higher than a year ago, S&P Global Platts trade data showed.

Indonesia's flour millers have also returned to their traditional suppliers as Australian wheat has become the cheapest in the region since 2016. This price trend is likely to continue into Q2 as the Black Sea's weather woes and wheat export restrictions keep prices elevated, while Australian wheat is pressured by a big crop.

"A litmus test is whether Australian wheat is going to be exported into Middle East/Africa and replace Black Sea," a Singapore trader said.

Several wheat vessels have been booked for the Middle Eastern and Australian suppliers will continue to attempt to make inroads in that region, where Black Sea and European suppliers generally dominate.

Australia and Black Sea: A tight race

Over recent years, the Black Sea has risen to provide considerable influence in global wheat prices, while Australia had taken a back seat to tackle droughts.

A massive turnaround in the 2020/21 wheat production suggests that Australia will reassume this position of influence and compete head-on with the Black Sea.

"Australia has become the base/cheapest wheat in the world -- the price floor or so, to put it clearly," the trader added.

Even though Australia seems on track to cater to the bulk of Southeast Asia's H1 business, the Q3 outlook is cloudy, as the Black Sea new crop should be ready to hit markets from July onwards.

Australia-China trade dispute

Historically, China has been a swing buyer of Australian wheat, taking less than 10% of its total wheat exports.

But in 2019-20 (October-September), China was the number one destination for Australian wheat, accounting for 15% of all shipments.

China has been on a grains buying spree in an effort to fulfill its obligation to the World Trade Organization, along with an eye to replenish grain stocks following flash floods, and a positive outlook around rebuilding its stock of pig herd.

"Australia is estimated to ship out 1.5 million-2 million mt of wheat to China in 2020-21, assuming current trade conditions are maintained," James Maxwell, manager at Australian Crop Forecasters, told Platts.

However, Australian exporters fear missing out on China's growing grain-purchasing binge as trade relations between the two countries have strained.

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Australia exported the bulk of its wheat exports to China over January-August, but since early September, Australian suppliers have pulled back following China's warning that it would heighten inspection of Australian wheat vessels.

A potential trade restriction by China may have a short term effect on the estimated 500,000 mt of wheat already booked for shipment over December 2020-February 2021, market sources said. However, any impact is likely to be short-lived as Australian wheat has found alternative homes and continues to attract buyers at prevailing prices.

Domestic factors shaping prices

Australian bulk handlers are facing higher elevation costs from managing a big crop and shipping capacity is looking tight for prompt shipments as end-users continue to buy hand-to-mouth amid demand uncertainty.

"Prices are being driven by logistics rather than grain availability," an Australia-based trader said.

Moreover, a strong yet volatile Australian dollar raises the risk of making its exports less competitive in the international market.

In 2020, the Australian dollar has slumped to as low as A$0.5510 to the US dollar on March 19 and climbed to as high as A$0.7571 on Dec. 11. This volatility is likely to continue into 2021 as economic and political uncertainties persist.

Nonetheless, Australian wheat prices may be capped by competition between east and west coast suppliers, as sellers are incentivized to offload a bulk of the 21 million mt exportable surplus by H1 2021, or run the risk of having to compete with low Black Sea new crop prices.