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Black Sea competition impacting Australian wheat prices: Rabo

Grain Central, March 15, 2018

MANAGING production and logistics costs will be essential for Australian producers if their wheat is to remain competitive in South East Asian in the face of increased competition from Black Sea origins, a visiting global grains expert has warned Western Australian growers.

Rabobank global grains strategist, Stefan Vogel, said tightened global stocks outside China and dry weather across US winter-wheat areas was putting upward pressure on world wheat prices, but Black Sea competition would determine price prospects for WA growers.

Rabobank global grains strategist, Stefan Vogel, said tightened global stocks outside China, and dry weather across US winter wheat areas, were putting upward pressure on world wheat prices, but Black Sea competition would determine price prospects for WA growers.

Mr Vogel said WA grain growers would need to keep a close eye on their own cost structures, while at the same time maintaining the high-quality grain for which Australia is renowned, to ensure they remain competitive with low-cost Black Sea origin wheat.

Short-term price lift

London-based Mr Vogel has been touring WA’s grain-growing region for a series of presentations to grower groups.

He said while the wheat price was currently surging, with Chicago Board of Trade (CBOT) values up about 20 per cent since mid-January, this was primarily driven by concerns about prolonged dry US conditions and its prospect of a reduced 2018 harvest.

“This still has time to recover, given the US winter wheat crop has only recently broken dormancy,” Mr Vogel said.

“The short-term wheat price outlook has improved due to yield risk in the US from dry weather conditions, but Black Sea region crops again have good growing conditions, and these pose the largest risk of downside for physical wheat prices.”

“The good news is for now prices are supported, but for how long? At the end of the day, the Russian crop will tell us where prices need to be.

“It might not matter how long there is dryness in the US; it will be a matter of what your export competition is doing and that will come out of the region of Russia.”

Big crops the norm

Mr Vogel said Black Sea-origin wheat exports into South East Asia have grown significantly since, and this growth was not likely to abate.

“Good weather has been the primary driver of the dramatic increase in Russian wheat production, particularly in the past two years.”

Russia’s crop in 2017 was about 20pc greater than 2016, when its crop was 15pc greater than its previous record.

“When Russia has a massive crop, it needs to try to get it on to the world market, and we see the impact clearly this season, where Russian exports are moving to South East Asia to a much larger extent.”

While a more average-sized crop is expected this year from Russia, and the other Black Sea countries, Mr Vogel said he expected the record crop size seen in 2017 would be the standard in 10 years’ time.

“We will have up to an additional 25 million tonnes (Mt) more Black Sea wheat coming on to world export markets, compared with the volumes seen in 2016/17 – with even larger Russian exports than this season and further yield increases in Ukraine and the Danube region,” he said.

“The question is: Will there be enough demand in the world for the wheat that Russia and the Black Sea has to provide?”

African, Southeast Asian import growth key

Mr Vogel said growth in demand from Russia’s traditional wheat market, Africa, and particularly sub-Saharan Africa, is expected to absorb much, “but not enough”, of this additional Russian production.

South East Asian markets were expected to be a focus for the Russian surplus.

“After the African demand growth over the next 10 years is satisfied, we will have probably 5Mt of excess Russian wheat and more volumes from other export regions that still have to go somewhere else in the world, and that is likely to be South East Asia.”

“The good news for Australian growers is that the demand for wheat in that region is growing, driven by population growth and diet changes, but the question is whether the demand in South East Asia is big enough to absorb it all.

“Australia is clearly the prime supplier in South East Asia and our view is that the market will continue to be there for Australian wheat, but the competition will be ongoing.

“This will likely see Australia lose market share in percentage terms, though not in actual volume as the South East Asian market grows.”

Nevertheless, Mr Vogel said “keeping a close eye on costs” would be extremely important in Australia to make it stays competitive.

“Labour costs are high here, and land prices are also something to keep a close eye on when it comes to farm expansions, because Russia is very competitive on the cost side with currency that is fairly weak.

“That said, inland logistic costs in Russia and Ukraine are high and the supply chain in those countries needs to improve to handle future volumes.

“Still, cost control remains crucial for WA growers to maintain a competitive position, though not at the expense of maintaining the high-quality product that your exports markets prize.”

Mr Vogel, who is touring Australia as part of Rabobank’s Visiting Experts program, spoke with grain growers and industry representatives at a series of presentations across WA last week, including to grower organisations, the Liebe Group and Stirlings-to-Coast.

Source: Rabobank

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