Analysis: Black Sea wheat dislodges Australia's dominance in Asia

29.05.2018

Asian buyers are increasingly turning to Black Sea milling wheat as Australian Premium White wheat continues to rally on extended dry weather.

APW wheat prices surged by $10/mt over the last week to $255/mt FOB Kwinana Friday, S&P Global Platts data showed. This was the highest year to date, having risen 13% since January 2, 2018.

The ongoing rally has prompted Asian buyers to seek out Black Sea milling wheat following a widening of the spread between APW and Black Sea wheat prices.

Black Sea origin 11.5% protein wheat for new crop was heard tradable at $235-$240/mt CFR Southeast Asia for August shipments, according to trade sources.

Given continued dryness across the major Australian wheat belt, growers continued to hold on to existing stocks in case there is a scarcity of new crop wheat for the 2018-19 harvest year.

"Offers [on the export market] are nowhere to be seen," an Australia-based trader said.

This made it difficult to gather sufficient quantity of wheat from farmers to put together a vessel for export, traders said.

Adding to this, domestic demand and prices in Australia have strengthened considerably in recent weeks, particularly for Australian Standard White grade or feed wheat, which in turn pushed up prices for milling wheat.

"A lot of feed stock is working its way from the west towards Queensland so there is little incentive to export," another Australia-based trader said.

As a result, Asian buyers were seen paying up for prompt shipments as they had to compete with the strong domestic demand.

A deal was heard done for 45,000-50,000 mt of Australian feed wheat at $267/mt CFR Philippines for shipment in June 15-July 15 on May 23. On the same day, another buyer from the Philippines booked a 50,000 mt feed wheat cargo from the Black Sea at mid-$230s/mt CFR Philippines for July shipment.

The two trades demonstrated buyers with inelastic demand for Australian wheat are currently paying a premium of about $32/mt on a CFR basis.

Typically, Southeast Asian mills are willing to pay a premium of about $10-$15/mt for Australian milling wheat due to its better quality. The quality premium tends to be lower for feed wheat, sources said.

Australian wheat exports for 2017-18 (October-September) are forecast at 16.8 million mt by Australia's Department of Agriculture and Water Resources.

Market participants are however, skeptical on whether this export estimate can be reached by this September as foreign demand continues to wane given price uncompetitiveness.

ASIA'S INELASTIC DEMAND FOR APW

Elasticity of APW demand varies depending on usage and consumer dependence across importers in Asia.

Black Sea origin 11.5% protein wheat is unlikely to fully replace APW in blending ratios for making noodles and steamed buns due to its unique characteristics, but the blending ratios can be more flexible when it comes to baking of bread or biscuits.

"For us, it's 1 is to 1 replacement. We can blend Black Sea with US origin wheat," a buyer based in the Philippines said.

Many buyers in Southeast Asia have experimented with Black Sea wheat and successfully discovered a blending ratio that reduces their dependence on APW without significantly compromising on quality, market sources said.

"It took a few months for buyers to realize Australian prices are too high and they need to change the formula. It took another couple of months to experiment but by now, they have figured it out," a trader in Singapore said.

"Australian prices have rallied a lot so we are trying to maximize usage of Black Sea," a source from a major flour mill said.

On the other hand, several buyers in Thailand, South Korea and Japan said the long history of using Australian, US and Canadian wheat has formed a level of dependence, making it difficult for end consumers to accept wheat of a different origin.

"The South Korean market has been using Australian wheat since 1970. So buyers have become used to a certain quality and some are very particular about the wheat origin," a buyer in South Korea said.

A buyer in Thailand agreed, adding: "quality is an issue for Black Sea wheat."

Still, some South Korean buyers have been testing Black Sea wheat, though no success has been achieved yet, buyer sources said.

From the second half of 2017, Japan has allowed millers to buy a total of around 1 million mt of wheat from trading companies directly. Previously, millers had to procure entirely from the Ministry of Agriculture, Forestry and Fisheries.

This has opened up an opportunity for millers to adjust the blending ratio to some extent in an attempt to reduce cost. Consequently, to minimize cost of input, some millers are trying to slightly increase the use of APW while reducing that of the more expensive Australian Noodle Wheat.

Typically, Japanese noodle blend consists of minimum 60% ANW and 40% APW.

"The quantity allowed to adjust the blend is not very much, so millers cannot make any significant changes," a trader based in Japan said.

Japan imported 5.8 million mt of wheat in the 2017-18 (July-June) marketing year and the US Department of Agriculture predicts imports to remain flat for the 2018-19 marketing year.

In general, market participants have extensively highlighted the superior quality and characteristics of APW relative to Black Sea wheat.

Additionally, Australia's geographical proximity to key buyers, particularly in Southeast Asia, gives Australian wheat an edge in terms of logistics and quality such as moisture level, which may increase over a long period of shipping time, trade sources said.

Australia's largest importer, Indonesia, is set to become the world's biggest wheat importer in the 2017-18 season with an estimated import volume of 12.5 million mt. Though Australia owns majority of the country's market share due to the noodle industry's preference for Australian wheat and close proximity, Australia is facing strong competition from Black Sea wheat exporters.

"If the Australian wheat continues to price out, it is going to continue losing its market share," a buyer said.


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