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Australian volume needed as Asia seeks extra 20Mt of wheat

by Liz Wells, 02 August 2018

AN increasing flour-milling capacity and economic growth will see Asia expand its annual demand for imported wheat by 20 million tonnes (Mt), which means Australia needs to increase its wheat yields if it wants to maintain its share of that market over the next 20 years.

Bunge Asia Pte Ltd grains distribution director Will Syers addresses AGIC 2018.

That’s the opinion of Bunge Asia Pty Ltd grains distribution director, William Syers, who presented his insights into Asia’s flour-milling sector to the Australian Grains Industry Conference (AGIC) 2018 in Melbourne.

Based off current prices, that will all be Black Sea and Argentina. The world is going to have to find more grain for Asia,” he said.

Mr Syers said while increasing protein had long been one of the key targets of Australian wheat production, producing the volume to supply established and developing markets was of paramount importance.

I think the focus 100 per cent should be on wheat yield, because buyers aren’t paying for quality,” he said.

If we focus on higher protein, we’ll lose out on yield.”

In his AGIC address, Mr Syers said Asia’s expanding flour-milling sector was showing more flexibility in terms of the wheats it could use, and buyers were sourcing wheat from cheaper non-traditional origins, namely Argentina, Russia and Ukraine.

That’s a trend we’re going to see increasing.

There’s also going to be an increased demand for Australia if more grain can be produced.”

The Asian market is made up of around 16-17Mt of South East Asian demand, 12-13Mt of North Asian demand, and a further 7-8Mt from South Asia.

The North and South East Asia markets have both been estimated to expand to 20-22Mt in coming years, with the rest of the growth likely to come from South Asia.

Pain in Indonesia

Also speaking at AGIC was S&P Global Platts Asia-Pacific agricultural manager, Andrei Agapi, who said the premium Australian wheat enjoyed over Black Sea wheat was already costing it market share in some Southeast Asian countries.

The most painful market for Australia is Indonesia,” Mr Agapi said.

Indonesia has been the most efficient market in Southeast Asia to switch from Australian to Black Sea when prices makes sense.”

Mr Agapi said that started to happen three years ago, and lower Black Sea prices had given South East Asian buyers, including Indonesia, some power in negotiating lower prices for Australian wheat.

The spread has widened from $11 to $25 a tonne, and the majority of millers are switching to Black Sea and adjusting their machinery.

I’m not sure how reversible this process is.”

He said Australia’s rising wheat price had tempered demand from South Korea, where the market was growing, but not for Australia.

There’s a 4Mt export market all up in South Korea, and Australia was not able to develop growth in demand as the US was, and just because of pricing.”

Based on the current West Australian price of Aus $270/t, Mr Agapi said wheat sales of new-crop wheat were not attractive to the trade, and had resulted in reduced forward bookings for 2019 shipment.

Q1 loadings have been very slow.”

Mr Agapi said despite a $60/t premium over Black Sea wheats, Australian shipments still had a place.

Despite this huge increase in pricing, Australia still has a shot in being competitive into Southeast Asia.”

New markets emerge

Mr Syers said Bangladesh, India and Sri Lanka were increasing their intake of imported wheat, with Bangladesh leading the charge in markets which were developing without a reliance on Australian, Canadian or US wheat.

They’re different; they’re using non-traditional origins, and that’s setting a pattern for what we’re seeing elsewhere.”

Mr Syers highlighted Myanmar as another market with large potential, based on its economic growth of 8-9pc, and the likely maturing of its grain imports from a containerised buyer of mostly Australian wheat to a bulk market.

It won’t be long before it’s exceeding markets like Malaysia.”

Flour margins squeezed

Mr Syers said flour margins across Asia were tight, and top priority for millers was to land the cheapest wheat they could to make the type of flour they needed to produce.

He said workable milling margins existed in markets like Thailand and The Philippines, but were much tougher in others.

Indonesia and Vietnam are the real bloodbaths with respect to margins.”

However, this was not seen as threatening Australia’s and Indonesia’s long relationship.

There’s definitely an inelastic proportion of Australian demand, and we’re probably at that today in Indonesia.”

Supporting demand growth generally in Asia was its growing middle class, characterised by its dietary preference for meat and wheat over rice.

Mr Syers said health trends associated with the rising middle class were boosting demand for some mixed-grain and speciality flours, and value-adding, as demonstrated by food companies like Indonesia’s Bogasari/Indofood, which had moved into flour milling.

There’s a higher proportion of tailored flours versus generic brands; more people producing specialist flours and pre-mixes.”

Black Sea discount

Mr Syers described the rising export profiles of Argentina and the Black Sea as “the elephant in the room”.

We’ve seen massive growth in the Black Sea and Argentina.

These origins, plus the EU, were always there for feed wheat, and they’ve improved agronomically, and they’ve improved their ports.”

He said their better grain quality and more reliable supply had made them serious contenders in Asian markets.

It is creeping in. I don’t think it’s ever going backwards; millers have no choice but to use Black Sea and Argentine wheat because I can’t see the margins changing.”

Mr Syers said millers were also looking to reduce their costs by using financial instruments like hedging and futures, buying forward when cash prices were cheap, and getting better freight rates.

Now you’re seeing people moving to 60, 65 and 70,000t cargoes; the difference in price between a Handymax and a Panamax might be $30/t, and the difference between a Panamax and a Supermax might be $6-$7.”

He said port capacity was no longer a limiting factor in some instances, as attractive prices could make lightering from a large bulk vessel at mooring, or storing onshore, an economic option.

And if you price forward, you can get a better freight price than you can if you buy spot.”

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