August 5, 2011

 

 

Wheat exports from Australia may take a beating as cheaper cargoes from the Black Sea region eat into its market share in Asia, while a stronger domestic currency makes overseas sales uncompetitive.

 

Expectations of a bumper harvest later this year coupled with slower old-crop sales could leave Australia, typically the world's fourth largest exporter of the grain, struggling with a larger stockpile, possibly hurting benchmark US wheat futures, which climbed 15% in July.

 

Russia is making aggressive moves to regain market share after a year's absence, selling around half a million tonnes of wheat last month to Egypt, the world's biggest importer, and making inroads in Asia, signing its first deal to supply milling wheat to Thailand.

 

Bangladesh, which buys around three million tonnes of wheat a year, is likely to lead the way in Asia, switching to Black Sea supplies.

 

For milling wheat, Southeast Asia is expected to take anything between 250,000 tonnes and half a million tonnes in the next six months from Russia and Ukraine, which will come at the cost of Australian and US supplies, traders and analysts said.

 

Russia, the world's third largest wheat exporter, banned grain exports last July after a devastating drought ravaged the Black Sea region, pushing global wheat prices higher.

 

Its return to world markets was a key factor contributing to a selloff in the Chicago Board of Trade wheat, which lost a quarter of its value in June.

 

Western Australian grain handler CBH Group said wheat exports had slowed in the second half of the year.

 

Although Asian millers are used to processing Australian and US grain, Russian wheat, quoted some US$40 lower than its rivals, will offer a compelling alternative to the likes of Indonesia, which is emerging as Asia's biggest importer, Malaysia and Thailand, encouraging them to switch origins.

 

A Thai flour mill bought Russian wheat at US$290 per tonne, including cost and freight, for shipment in August, which traders believe to be the first reported deal for milling wheat on that route in recent years.

 

Despite the small volumes, the deal was important as a large mill was buying Russian cargoes to test the quality.

 

Australian traders at a recent industry conference in Melbourne said they would struggle to match Russian milling wheat prices in Southeast Asia, even with the feed wheat.

 

The biggest hit for Australia will come when the region's top millers such as the Interflour Group, which has operations in Indonesia, Malaysia and Vietnam, and Indonesia-based Bogasari, start taking Black Sea grains.

 

Russian milling wheat with around 11% protein is quoted around US$300 a tonne, including cost and freight, into Asia, compared with US$345-$350 for similar quality Australian wheat.

 

A strong Australian dollar has played its part in keeping the country's prices at higher levels in the domestic market, with farmers reluctant to sell new-crop grain at a lower price.

 

Australia expects a crop of 26.2 million tonnes this year, just below a record 26.3 million in 2010-11, and the quality is seen higher after late-season rain damaged much of last year's crop.

 

In the feed wheat category, analysts expect a bigger switch by Asian buyers to Black Sea supplies.

 

South Korea, which annually buys around 1.7 million tonnes of feed wheat and the Philippines, which takes close to one million tonnes, are both likely to turn to Ukraine for supplies.

 

The export slowdown could leave Australia with a carryover stock of around six million tonnes at the end of marketing season in September.

 

"We're predicting a carryout of six million tonnes from the old crop while the 2011-12 harvest could be around 25 million, so after taking into account domestic demand, there could be around 24 million tonnes of surplus available for export after the next harvest," analyst said.