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Sustained effort required to service emerging wheat users in South-East Asia

Henry Wells, March 15, 2019

AUSTRALIAN farmers and marketers have choices to make about whether and how keenly they want to hitch a ride on expanding opportunities in South-East Asia, according to Singapore-based Rabobank senior grains and oilseeds analyst Oscar Tjakra.

Oscar Tjakra near Corowa, NSW, visiting Australian farming regions

Visiting Australian farming regions, Mr Tjakra said two out of the three wheat consuming sectors in South-East Asia were expecting to grow strongly.

While maintaining growth overall, the traditional noodle sector would grow more slowly than the bakery sector and the animal feedstuffs sector.

“Growth in consumption in South-East Asia will translate to an increase in wheat imports,” Mr Tjakra said.

“In 2018, wheat consumption, as a combination of wheat for feed and food, was about 25 million tonnes (Mt). By 2023 we expect that to be around 29Mt.”

While wheat for livestock feed forms a smaller proportion of wheat usage compared to food, demand is growing particularly in The Philippines, Vietnam, Thailand and Indonesia.

Overall, wheat demand in South-East Asia is growing at about 3 per cent compound annual growth.

Young demographic

Driving this demand is the young demographic (with half of the population in the region expected to be aged 29 and below by 2025) and the increase in household food expenditure as out-of-home consumption rises and consumers increasingly crave convenience.

“But the growth will occur in non-noodle sectors such as bakery, pastries, cakes, bread and snack foods,” he said.

“South-East Asian mills traditionally buy wheat from Australia for noodle production.”

This is where the technical aspect of different flour types required for bakery and snack foods from wheats of all other origins is constantly evolving.

“I’ve been informing farmers on these trends and posing to them the question whether they want to participate in the growth story.”

Drought impact plus endemic high costs

Australia’s eastern states’ drought has driven prices higher, opening wide the door to other countries’ wheats to supply South-East Asia.

Indonesia is Australia’s biggest wheat market, it is diverse in quality requirements and highly price sensitive.

“Indonesia, for example, which usually takes around four to five million tonnes of Australia’s wheat, has booked about one million tonnes of wheat from Argentina for delivery first half 2019, its largest volume on record for this period,” Mr Tjakra said.

Price is a strong determinant of buying pattern, and cheaper origins will do business when Australian wheat prices are higher than Argentina, Russia, Ukraine or Kazakhstan.

Australia’s entrenched costs of production, supply chain costs, are higher than competitors’.

“The Black Sea region poses the biggest threat to Australia’s market share in South-East Asia,” he said.

“The average 2018 landed cost for Black Sea region wheat was around US$235/t, compared to Australia’s US$250/t.”

Over the period from 2011 Australia’s share of South-East Asian wheat imports fell from 50 per cent to around 40pc.

“With drought-reduced volumes this year it could drop to 30 to 35pc,” he said.

 

“Indonesia, …which usually takes around four to five million tonnes of Australia’s wheat, has booked about one million tonnes of wheat from Argentina”

Tight milling margins

The other factor influencing millers’ scrutiny of price is the overcapacity in wheat mills across South- East Asia.

“New milling capacity of around 10 million tonnes was built in five major South-East Asian countries, Indonesia, Malaysia, Thailand, Vietnam and The Philippines between 2000 and 2018,” Mr Tjakra said.

“Wheat millers in those countries are under-utilised by around 50pc, which results in tight milling margins.

“To overcome the tight milling margins situation, millers try to reduce their cost of production by blending wheat from different origins to get the mix of flour they want.

“To help in an environment where mills are very price sensitive they may buy Black Sea wheat and blend it with Canadian wheat.

“South-East Asia still has a lot of people on low incomes that really care if there is a 5pc increase in the price of wheat flour, which makes it very hard for the mills to pass on to the customer.”

Message for Australia

Mr Tjakra said Australian producers needed to keep a strong hold on the cost of production, particularly supply chain costs.  While production costs are to some extent endemic, the fact is they do help or hinder competitive advantage.

He said maintaining excellence in promotion and marketing by Australia was also critical to keep the choices of Australian grains in front of every user.

“Promotion is not the main mandate of trading companies though this vital work needs constant effort.”

He acknowledged the work of the Australian Export Grains Innovation Centre (AEGIC) along with Australian trade promotion agencies, but said that all the worlds’ wheat exporters worked very hard to supply their own wheat South-East Asia.

He stressed that Australia needed to keep understanding buyers’ needs in South-East Asia and to keep getting the message across regarding Australian wheat functionality as particular users’ needs evolved.

Demand projections, wheat:

Indonesia, Malaysia, Thailand, Vietnam, The Philippines total (million tonnes)*

2018 2023
Wheat for food 17.2 20
Wheat for feed 7.9 9

Source: Rabobank

*the projections in the table refer to the five named countries. Wheat usage elsewhere in the region is also expected to rise, with the Indochina region of Myanmar, Cambodia, and Laos holding particularly strong prospects.

 

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