Black Sea wheat is set to make bigger inroads into Southeast Asian markets in the coming years as price-sensitive buyers in the region look for alternatives to Australian supplies, Vijay Iyengar, CEO of Agrocorp International, told S&P Global Platts in an interview.
Countries like Indonesia, the Philippines and Vietnam will be increasingly looking for wheat from the Black Sea region, not only because of the price difference with Australian wheat, but also because of the growing acceptability of those cargoes among their domestic grains sector, he added.
"I think Black Sea wheat will stay and will not lose market share even if Australian wheat becomes competitive because the difference between pricing is very substantial," said Iyengar, who founded the agriculture commodity trading and processing company in 1990.
The price spread between the Platts Australian Premium White wheat FOB Kwinana and the Platts 12.5% protein Russian wheat FOB Black Sea reached $57.5/mt in December 2018.
Australian wheat prices have subsequently declined, but are still at a premium to Black Sea's new crop. Platts 12.5% Russian wheat was assessed at $208/mt on Tuesday, while Platts APW was assessed at $229/mt.
But in relatively more mature Asian markets, such as Japan, Australian wheat may regain its share, Iyengar added.
"Australian wheat is a little cleaner, lower moisture and in certain applications better than Black Sea wheat. But you know everything boils down to price. It depends on to what extent millers are prepared to pay additional premium for Australian wheat," he said.
In the last few years, Australian wheat has struggled to compete in Southeast Asian markets with supplies from the Black Sea region, which includes Russia, Ukraine, Kazakhstan, Romania, and Bulgaria.
Wheat imports from Ukraine to Indonesia increased significantly starting 2015, according to a March US Department of Agriculture report. In addition to competitive prices, Ukrainian wheat quality has significantly improved in recent years, allowing for higher rates of blending. Similarly, Russian wheat exports to Indonesia have also increased manyfold in recent years, as per the USDA report.
Black Sea wheat is expected to account for over 40% of Indonesia's total wheat imports in 2018-2019, according to the USDA.
According to Iyengar, Russian wheat, with 12.5% protein content, will continue to be the flag-bearer of milling wheat in Southeast Asia.
The increase in exports from the Black Sea region to Southeast Asia has come at the expense of Australian wheat, which has faced supply issues because of weather-related problems, in addition to relatively higher prices.
Australia's wheat output fell to 17.30 million mt in 2018-2019, from 21.30 million mt produced in 2017-2018. As a result, their exports fell to 10 million mt in 2018-2019, from 13.85 million mt in the previous year.
Although flows of Black Sea wheat to Southeast Asia, especially to Indonesia, are not active now, it will gather pace later in the year, Iyengar said.
Indonesia is Australia's biggest wheat export market, with an estimated 4.2 million mt of Australian wheat being exported to the former each year, according to the USDA. Australia's share in the Indonesian wheat market is currently 31%, while that of Ukraine and Russia combined is about 35%.
"The Indonesian market has been growing steadily. It's one of the markets that has been in the last two years switching over to Black Sea wheat from Australian because of lack of availability and price differentials with Australia. I think that will continue," Iyengar said.
Vietnam will also see some inflows from the Black Sea region, as phytosanitary issues start getting resolved, he added.
GLOBAL PRICE OUTLOOK
The main factors that could potentially influence Chicago Board of Trade prices in the near term, according to Iyengar, are weather conditions in the Black Sea region and the US, the impact of El Nino weather conditions, and US-China trade talks.
"I think there will be some stability in prices around current levels," Iyengar said, commenting on the outlook for global wheat prices.
The July contract for the CBOT soft red winter wheat futures recently rallied to a three-month high to reach $4.92/bu on Tuesday, mostly on the concerns of excessive moisture hampering spring wheat sowing after reports of crop damaging rains in the US' southern Plains region.
"In order for prices to pick up you might need to see some adverse weather conditions either in the northern hemisphere, or we need to see some buying coming up as a result of negative conditions domestically," he added.
However, one of the factors that can move wheat prices south in the next marketing year is higher global inventories expected by top agriculture agencies.
The USDA has said that global ending stocks for wheat are forecast to grow to 293 million mt in 2019-2020 against 274 million mt in 2018-2019, with China continuing to account for about half of the total.
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