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Analysis: Stars align for Australian wheat as Russia curbs exports, China stocks up

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Australia benefits from China's buying spree despite trade tensions

Lack of competition, demand from feed sector support prices

Strong pace of exports tightens Australia's shipping slots

Singapore — The tight availability of global wheat cargoes amid export restrictions in Russia, the world's largest wheat exporter, and Argentina is proving a silver lining for Australian grain suppliers as they finally emerge from three consecutive years of drought.

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Export restrictions coupled with unfavorable weather conditions have pushed Russian wheat prices to more than six-year highs, while demand remains resilient as importing countries remain keen to secure cargoes as concerns persist over supply shortages as the coronavirus pandemic enters its second year.

S&P Global Platts' Russian 12.5% wheat index surged 53% from Aug. 17 last year to $303/mt FOB Russia Jan. 19 -- a level not seen since March 2014 -- before losing some ground to be assessed at $282/mt FOB Feb. 12.

While Australian wheat prices have also retreated recently due to selling pressure, with Australian Premium White or APW last assessed at $284/mt FOB Kwinana Feb. 11, down $13/mt from a year-to-date high of $297/mt on Jan. 21, the market is not expecting a dramatic downward correction in the near term amid the lack of competition from other wheat origins for shipments in the first half of the year, as well as firm support from the feed sector.

China's demand overrides trade tension

While China-Australia trade friction is at an all-time high, this has not stopped China, the world's biggest wheat producer, from continuing to support Australian wheat prices, both directly and indirectly.

Despite reports of Chinese authorities strengthening inspections of Australian wheat vessels, China booked a record volume of more than 800,000 mt of Australian wheat in December, customs data showed.

This was the largest monthly wheat export volume to China on record, and almost double the previous record of 402,000 mt in January 2014, said Andrew Woodhouse from Advance Trading. It was also reportedly the biggest monthly wheat export volume to any single country.

Another 200,000 mt of Australian wheat was allocated to China in January in a shipping lineup seen by Platts.

Escalating trade tensions have made it difficult for Chinese buyers to purchase Australian wheat in bulk since September, although trades in containers have been going through.

However, talk has emerged that China reappeared in the Australian wheat market recently, purchasing about 400,000 mt for March-May shipment, and was looking for another 200,000 mt for May-June shipment in the week ended Feb. 13.

While the trade risks are high, which is limiting the number of Australian suppliers willing to work with Chinese buyers, Australian wheat is also gaining from China's upward support to global grain prices, as its efforts to replenish state reserves and meet growing demand from the rebuilding of its pig herd after an African swine fever outbreak shows no sign of slowing down.

Feed demand puts floor under prices

Southeast Asian feed buyers are scrambling for feed alternatives as the global corn balance sheet is set to remain tight amid production declines by major producers and China's sustained buying spree.

Adding salt to the wound is the fear of corn export delays from Myanmar due to a military crackdown, as Vietnamese feed buyers turn to Burmese corn in times of high international corn prices.

The surge in global corn prices to record levels has pushed up wheat prices in tandem as the market tries to maintain the corn-feed wheat price spread.

The price spread between Platts assessed Northeast Asian corn and Australian ASW, a feed grade quality wheat, has flipped to negative, narrowing from $71.30/mt on Aug. 7 to minus $6.50/mt on Feb. 11.

Feedmillers in the region are keeping a close eye on both Australian feed wheat and feed barley prices, with both having the potential to displace a portion of their corn demand going forward.

In an unusual move, a private buyer in the Philippines booked at least a 40,000 mt of Australian feed barley in lieu of feed wheat on Jan. 22 due to the unusually wide price spread of more than $45/mt between the two commodities at the time.

Shipping slot availability driving prices

There is currently a lack of competition in the Asian wheat market, with Australia the most competitive origin in both the feed and milling wheat sectors.

Australian suppliers are also seeing resilient export demand for other products such as barley, canola and sorghum, which has been a contributing factor to tight shipping availability.

The country's barley exports are estimated to have surged 250% year on year to 2.4 million mt over October-January, despite China being ruled out of the market, while wheat exports were estimated to rise by 57% over the same period to 4.4 million mt, data from Advance Trading showed.

"If it's not feed wheat, it's feed barley -- whatever the desired feed product is, it's all shipping out of Australia," a trader said.

Tight shipping slot availability is supporting wheat prices, especially for prompt shipment periods, as the buying strategy remains hand-to-mouth -- and the trend is expected to persist in the months ahead, so long as demand remains buoyant and competition in destination markets remains lacking.