Australian wheat is facing tough competition from Black Sea new crop into markets including Indonesia. Photo: PT Bungasari Flour Mills Indonesia

GLOBAL wheat offers have been on a slippery slide over the past month as confidence grows around new-crop Northern Hemisphere production. This is especially the case in the Black Sea region, where early season concerns around dryness and late planting have been placated by favourable winter and early spring conditions.

The results of last week’s tender by Egypt’s General Authority for Supply Commodities (GASC) confirmed the much lower new-crop price regime. It also asserted the Black Sea regions eagerness to get back in the game following the export tax confusion that has dominated market talk, and action, in recent months.

The market was quite surprised that Egypt issued a tender so close to its own harvest, which is expected to commence this week. The shipment period was also a surprise, as GASC rarely tenders as far out the curve as they did last week. Speculation suggests this demonstrates confidence around domestic production, with the government hoping to procure 3.5-4 million tonnes (Mt) from local growers this season.

Prices show big inverse

When the tender closed last Tuesday, GASC had received around 1.25Mt of offers.  There was 400,000t of Russian wheat tendered, with all prices falling within a US$1 range. No French wheat was furnished, but the cheapest offers from Russia, Ukraine and Romania were all within US$1.65/t of each other, underlining the competitive nature of the new-crop Black Sea market. The lowest price was Russian origin at $234 free on board (FOB) which is around $230/t FOB after additional GASC costs are taken into account. Nominally, this equates to around $209/t after the export tax is applied. The variable rate tax is currently set at 70 per cent of export price above $200/t FOB. Who knows what it will be by the time the grain is actually shipped, such is the uncertainty around the Russian government’s market intervention?

GASC ended up buying six cargoes totalling 345,000t for August 1-10 shipment, of which five were Russian origin and one will be shipped out of Ukraine. The prices ranged from $251-$252.75/t, including cost and freight (c and f), with the average price paid coming in at $252.09/t. This was $45.31/t cheaper than the average price paid for six Romanian cargoes in its previous tender back on March 11 for April 15-25 shipment.  The old-crop/new-crop market inverse for wheat out of the Black Sea has been evident for some time, and once production concerns eased, new-crop prices were always going to decline. However, this is still one of the largest downward moves GASC has witnessed between tenders for many years.

It highlights the eagerness of Russian exporters to get some new-crop sales on their books, despite the export tax burden and uncertainty.  The Russian Federal State Statistics Service, Rosstat, released its final 2020-21 production numbers last week, calling the national wheat crop a record 85.9Mt. Debate now revolves around the volume of exports, with the USDA raising its estimate by 500,000t to 39.5Mt in last week’s WASDE report. Leading agricultural consultancy SovEcon currently has exports pegged at 38.9Mt.  However, both are at the high end of estimates, with some in the trade as low as 35Mt. Either way, 2020-21 carry-out stocks will increase compared to the previous season, with the USDA forecasting a 67pc increase to 12Mt, and others are as high as 17Mt.  This will obviously add to new-crop supplies and potentially
increase Russia’s exportable surplus if the production outlook remains favourable through to harvest.

On the new-crop front, SovEcon added 1.4Mt to its Russian production forecast last week due to vastly improved crop conditions in the country’s south. The updated estimate of 80.7Mt would be the third-largest crop on record, but it does come with a caveat around production concerns in Russia’s central regions, where crop health is mixed.

Good start in Ukraine

Favourable early spring weather and an optimistic forecast for the balance of April has consolidated Ukraine’s new-crop wheat production estimate at 26.7Mt. This is smack on the average of the last six years. Even in the driest cropping districts, soil-moisture levels are at or above the long-term average, which augurs well for crop development as the spring temperatures begin to rise in the second half of April.

The big sleeper in this whole Black Sea wheat supply equation are the rising tensions between Russia and Ukraine. They have been simmering since the illegal annexation of the Crimean Peninsula in 2014, but there have been several deadly clashes in recent weeks leading to a build-up of troops and tanks on the Russian side of the border.

As Ukraine is geographically divided between Europe and Russia, so too are the people divided; pro-Russian and pro-Western. Pro-Russian separatists also claim control over eastern Ukraine, including the Donbas region, which they have illegally controlled for the past seven years. It is not the impact on production that is a concern; it is the potential disruption to trade flows out of the Black Sea region if the conflict escalates.

The building expectation of a bumper harvest in the Black Sea region is weighing on Australian export prices. Russia is the world’s biggest exporter of wheat and the global export price setter. While Australia enjoys a substantial freight advantage into South-East Asia, the substantially lower new-crop Russian price means Australian export offers have had to adjust lower to compete with the aggressive Black Sea offers.  After enjoying prices in excess of $300/t c and f into Indonesia earlier in the marketing campaign for Australian Premium White (APW) wheat, prices are quoted in the $280-$285/t c and f range for nearby business.  Australian exporters now have to compete with new-crop Black Sea offers of $270-$272/t c and f into Indonesia for July-August shipment.

With soil-moisture conditions ideal for planting in Western Australia, New South Wales and Queensland, there is already potential for another big Australian crop. This will increase pressure to clear the exportable surplus from last year’s record crop, necessitating competitiveness against new-crop Black Sea exports in the second half of the year.