Black Sea competition bites in Australian markets: AGIC

Liz Wells August 1, 2019

THE very low production costs of Black Sea grain are on the rise as its farmers invest in improved productivity, and Australia can expect no let-up in competitiveness from this formidable producer in key Australian markets.

Sergey Feofilov

Those were the key messages from the Shifting Tides session yesterday at the Australian Grains Industry Conference (AGIC) event in Melbourne.

The first was delivered by UkrAgroConsult founder and director general Sergey Feofilov, and the second came from S&P Global Platts head of Asia-Pacific agriculture Andrei Agapi. 

“We ask ourselves why the competitiveness of Black Sea grain is so high in the global market and our answer is because of very low production costs,” Mr Feofilov said.

He said this could change as Ukraine, under its newly elected government, expects economic stability to continue, interest rates to drop further and farmers to spend more on crop inputs.

“Just two weeks ago, the national bank of Ukraine decreased (interest rates) down to 17 per cent, and our forecast is 14-15pc by December.

“This trend will continue next year due to microeconomic stability.”

Mr Feofilov said farmer expenditure on inputs including seed, fertiliser and crop-protection was expected to increase, and this would reduce production margins, especially if grain prices stayed at the low levels of the past few years.

“Our forecast is production costs will go up.”

Mr Feofilov said Russia and Ukraine’s agricultural landscape now  featured large-scale farms, which in Russia covered up to 1 million hectares.

“The most remarkable changes…for the previous two seasons is that these farms more and more focus on their profitability, on how to increase their effectiveness. 

“The expansion of land is not the target as it was three to four years ago.”

Mr Feofilov said while farmers in Russia received government support, Ukraine producers were funding their operations from their own pockets, and both countries would continue to compete in world markets.

“The export share remains high in both countries.”

Ukraine’s forecast for its marketing year, which started 1 July, is forecast by UkrAgroConsult at a record 70 million tonnes (Mt), including 24.7Mt of wheat, 35.5Mt of corn and 7.1Mt of  barley.

This is well below estimates for Russia, which harvested its biggest wheat crop in 2017, and has asserted itself in recent years as the world’s biggest wheat exporter.

“It more and more focuses on the production of wheat and wheat exports,” Mr Feofilov said of Russia. 

Mr Feofilov said current estimates on the size of the Russian crop varied widely, with production forecasts for the wheat crop now being harvested in Russia sitting at 71-77Mt, and 34-40Mt for exports. 

“This year, the numbers of production and export are uncertain because weather in May-July was very changeable all across Russia.”

Mr Feofilov said improving quality as well as rising production was a feature of the Ukraine crop, as more milling and less feed wheat was now being delivered to the export supply chain for customers including Indonesia.

“In the current season, the position of Black Sea wheat will also be strong in the key markets including very important Asian markets including Indonesia. 

Changing shares

Growing export programs out of Black Sea ports have interfaced with Australia’s reduced export surplus as a result of the drought in eastern Australia, which is estimated to have absorbed around 3.5M tonnes of grain from Western and South Australia.

Andrei Agapi

This would normally help to supply Asian markets, which Mr Agapi said have been using increased amounts of attractively priced Black Sea grain, and some Argentine wheat also.

“Indonesia is the number-one importer of wheat in the world; Russian and Ukraine dominance is coming,” Mr Agapi said. 

“It comes very much at the expense of Australia. 

“Australian wheat prices continue to drift away from other origins. 

“Argentina is capturing some demand, but not as much as people may think, because it’s only concentrated in a few months of the year.”

Mr Agapi said the 2017 spread between ASW and Black Sea wheat into Indonesia got to US$12/t in 2017, $28/t and $55/t in 2019.

“The average spread in 2019 is $24, so there’s really no chance of Australian wheat pricing in so far. 

“New-crop cargoes started to price in early June, and this is where the difference between the two origins spiked up. 

Mr Agapi said the inverse, or premium for old-crop over new-crop, Black Sea wheat had peaked at  $35/t, and that was wiped out by May 2019, when the Black Sea farmer wanted to be paid for carrying wheat for the many months since it was harvested. 

“This could be an opportunity for Australian wheat wheat to price, when Australia has almost no carry. 

“If that maintains in Jan-Feb, we may see some demand coming in. 

“We don’t expect the demand to be steady flowing, but more of a sporadic demand.”

Mr Agapi said The Philippines’ recent purchase of cargoes of Australian wheat was an example of such demand.

Behind Indonesia, The Philippines, Vietnam and Thailand are South-east Asia’s major wheat markets. 

Mr Agapi said Black Sea wheat last year captured a lot of demand in The Philippines. 

“It’s happened very much at the expense of Australian wheat.”

Mr Agapi said the pricing of Australian wheat from west to east coast has been a contributing factor to the strength in Australian values and their lack of appeal to South-east Asia, which represents about 16pc of total world wheat demand.

Mr Agapi said in the Thai market, the average spread between APW and feed wheat has been about $36. 

“The bad news is that the spread went up to $39, and in 2019 it’s $54. 

“What you have is essentially very cheap Black Sea cargoes.

Mr Agapi said Thailand has become a volume buyer of them.

“Also, price is king so they are looking at Argentina as well.” 

He said the premium for Australian wheat over Black Sea could narrow.

“It will very much depend on what Australia will do for the rest of the year and…where will be that breaking pojnt for Thailand in terms of elasticity.

“Also, price is king so they are looking at Argentina as well.”

Mr Agapi said South Korea was looking with interest at the suitability to milling for Black Sea wheat. 

“Usually I say they import feed wheat from the Black Sea because that’s not competing with Australian and US wheat. 

“However, the buyers there have already started to test some of the cargoes. 

“Initially they say they are not happy; that’s a very similar argument to what we had in Indonesia four years ago.”



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