Black Sea growers continue to challenge in Asian markets

Traders tell grains industry conference of increasingly volatile world market


Industry Insights
Andrei Agapi, the Asia-Pacific agriculture manager for S&P Global Platts, spoke at this year's Australian Grains Industry Conference. PHOTO Andrew Cooke

Andrei Agapi, the Asia-Pacific agriculture manager for S&P Global Platts, spoke at this year's Australian Grains Industry Conference. PHOTO Andrew Cooke

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Analysts predict Russia and Ukraine to continue cutting into crucial Asian grain markets.

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Traders speaking at this year's 'Australian Grains Industry Conference' revealed an increasingly volatile world market since Russia and Ukraine have become the dominant players.

Black Sea wheat producers will continue to make inroads into crucial Asian markets for the foreseeable future, analysts told the annual conference in Melbourne in August.

Russia and the Ukraine are gaining a bigger foothold in North-East Asian markets such as Japan, South Korea and China, at the same time as they continue to dominate in South-East Asian countries including Indonesia, market analysts said.

Andrei Agapi, the Asia-Pacific agriculture manager for S&P Global Platts, told the conference that Australia was losing market share to Russia and the Ukraine in Indonesia, the world's biggest wheat importer, where prices had been "bearish" since the start of 2019.

"Black Sea wheat prices are very competitive in Indonesia," Mr Agapi said.

"There is a US$11.50 per tonne price gap between ASW and Black Sea wheat and the gap is widening (that is, Black Sea wheat has a lower price relative to ASW in market) which is why Australia is losing out.

"We are expecting more demand for Australian product to start flowing through in December, although prices will continue to be dragged down by the lower-priced new crop from the Black Sea.

"The new crop from the Black Sea is selling at significantly lower prices than the old crop - around US$35/t."

This price difference has emphasised the imperative of Australia being responsive to consumers' quality expectations.

Black Sea wheat prices are very competitive in Indonesia. - S&P Global Platts Asia-Pacific agriculture manager Andrei Agapi,

Customer care

Franciscus Welirang, the chair of the Indonesian Flour Mills Association and director of Bogasari Flour Mills, the world's biggest flour miller, said that for Australian growers to protect their position in the market they needed to stay abreast of changes in consumption patterns.

"Noodles made from Australian wheat have been in high demand in Indonesia because of their colour stability, but that may change," he said.

"The market is changing as millennials (people born between 1980 and 2000) are starting to drive demand and production of products like bread and cakes is growing."

This is seeing more enterprises mix Black Sea wheat with Australian wheat, which is leading to changes in product quality.

"It is very important for the Australian grower to understand these developments," Mr Welirang said.

"Particularly since Australian wheat imports to Indonesia fell 67 per cent from 2018 to 2019, despite the total market growing one per cent.

Russian market analyst Sergei Feofilov predicted that Black Sea wheat would remain "very strong" in key Asian markets in 2019-20.

"Black Sea production and exports are likely to remain relatively steady in 2019-20," he said.

"While Russian production is expected to be three to six million tonnes lower (at 71 million tonnes), the Ukraine will continue to be very competitive because of its lower production costs.

Mr Feofilov, from UkrAgroConsult, said average production costs for a Ukrainian grower were US$133/t in 2018-19, compared with US$121/t in Russia and US$216/t in Australia.

"But Ukraine margins are declining as costs go up. The impact of that on competitiveness will be an important question in the coming years," he said.

CME Group senior economist Erik Norland said commodity prices in Australia tended to follow the Australian dollar value, which had weakened slightly since 2018 because of the Reserve Bank's cuts to interest rates.

However, as the US Federal Reserve starts to follow suit with rate cuts the Australian dollar and commodity prices are likely to be bolstered, he said.

CME Group senior economist Erik Norland speaking at the 2019 Australian Grains Industry Conference. PHOTO Andrew Cooke

CME Group senior economist Erik Norland speaking at the 2019 Australian Grains Industry Conference. PHOTO Andrew Cooke

"In international markets, the price of wheat is following the Russian ruble very closely," Mr Norland said.

"The Black Sea area has doubled its production of wheat in recent years, so it is little wonder that wheat prices follow the ruble.

"The rate of economic growth in China also has a very strong bearing on prices, usually with a 12-to-18-month lag."

Mr Norland said that while the US-China trade war made for lots of media headlines, it was not having a big impact on grain markets.

"The one exception is the market for soybeans, because China has stopped buying US soybeans and is now mostly buying from Brazil. That has left the US scrambling to find new markets for its soybeans," he said.

Illinois, US, corn grower and market analyst Dan Cekander told the conference growers needed to keep an eye on their cost structures in order to remain competitive.

Illinois, US, corn grower and market analyst Dan Cekander speaking at the 2019 Australian Grains Industry Conference. PHOTO Andrew Cooke

Illinois, US, corn grower and market analyst Dan Cekander speaking at the 2019 Australian Grains Industry Conference. PHOTO Andrew Cooke

"If you are trying to compete with the rest of the world, you need to have the lowest costs of production possible," Mr Cekander said.

"World wheat production is at a record level of more than 275 million tonnes, so there is plenty of world wheat supply.

"With the explosion of Black Sea production, American wheat plantings are at their lowest level since 1919."

US wheat has been replaced by increasing hectares of soybean and corn.

If you are trying to compete with the rest of the world, you need to have the lowest costs of production possible. - Illinois market analyst Dan Cekander

Mr Cekander said the growing popularity among consumers of "meat substitutes" was becoming an interesting factor.

"This trend looks like it will create strong demand for field peas, for example," he said.

"This could absorb some acres, and it could become significant if people start to see these products as a healthier alternative to meat."

Staying positive

National Farmers Federation president Fiona Simson said the grains industry had huge potential, "but we have to take it into our own hands".

"Grain is an important foundation industry for Australian agriculture, but it is also a huge industry for the future," she said.

"My message to growers is: 'don't rest on your laurels'. There will always be questions about the sustainability of the industry, so we always have to be looking at how we can improve that.

"How can we keep growing our industry and how can we keep attracting the best people into it?

"How can we add value to the products that we send overseas, and what innovations do we need to do that?"

Ms Simson said the NFF was looking forward to the Australian government ratifying important trade agreements with Peru and Indonesia that would help boost grain exports.

In a video address, Federal Agriculture Minister Bridget McKenzie said that Australia's grains industry was in "a great position, both domestically and overseas".

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