Managing production and logistics costs will be essential for Australian wheat producers to remain competitive in the South-East Asian market, in the face of the growing threat from Black Sea Region imports, a visiting global grains export has warned Western Australian growers.
Rabobank global grains strategist Stefan Vogel said while there was some good news in the outlook for wheat prices – with a reduction in the amount of global stocks across the world (outside of China) and dry weather across the US winter wheat areas elevating wheat prices across US exchanges.
However, with the Black Sea Region wheat crop (currently still in dormancy), expected to be in good shape – it will be upcoming Black Sea (and primarily Russian) exports into South-East Asia, Australia’s primary wheat export market, that will determine price prospects for WA growers. And in order to ensure they remain competitive with the low-cost Black Sea Region producers, WA grain growers will 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, he said.
London-based Mr Vogel, who has been touring WA’s grain-growing region for a series of presentations to grower groups and at Wagin Woolorama, said while the wheat price was currently enjoying a resurgence – with Chicago Board of Trade (CBOT) prices climbing some 20 per cent since mid-January 2018 – this was primarily driven by concerns about prolonged dry conditions and the prospect of a reduced 2018 harvest in the US. Although this still had time to recover, given it had only recently “broken dormancy”, he said.
“The short-term wheat price outlook has improved due to yield risk in the US because of the dry weather conditions, but it is the Black Sea Region (comprising Russia, Ukraine, Romania, Bulgaria and Hungary) which again has good growing conditions, which is posing the largest risk for physical wheat prices,” Mr Vogel said.
“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,” he told local growers.
Emerging ‘powerhouse’
Mr Vogel said Black Sea Region wheat exports into South-East Asia had grown significantly from 2011 to 2017. And that growth trend was not expected to abate in the future.
“There has been a really dramatic increase in wheat production out of Russia particularly in the past two years, primarily driven by good weather. We’ve seen 2016 production 15 per cent above the previous record and 2017 production almost 20 per cent above that again,” he said.
“And 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 ‘normal’-size crop is expected in Russia (and the other Black Sea Region countries) in 2018, Mr Vogel said he expected “the crop size we saw in the record 2017 season in Russia will be the standard in 10 years’ time, with the country regularly being able to produce the sorts of volumes of wheat we’ve seen in the last year”.
“In 10 years’ time, we will have up to an additional 25 million tonnes 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, which will add additional wheat supplies to the overall Black Sea exports,” 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 and South-East Asian import growth key
Growth in demand from Africa (Russia’s traditional wheat market), and particularly sub-Saharan Africa, is expected to absorb much, “but not enough”, of this additional Russian production, Mr Vogel said. And the South-East Asian market would continue to be a focus for Russian wheat exports.
“After the African demand growth over the next 10 years is satisfied, we will have probably five million tonnes 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,” he said.
“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 will be extremely important in Australia to make sure you stay competitive in the game”.
“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 a 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 Western Australia last week, including to grower groups Liebe Group and Stirlings to Coast.
Rabobank Australia & New Zealand is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has nearly 120 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 40 countries, servicing the needs of approximately 8.6 million clients worldwide through a network of more than 1000 offices and branches. Rabobank Australia & New Zealand is one of Australasia’s leading agricultural lenders and a significant provider of business and corporate banking and financial services to the region’s food and agribusiness sector. The bank has 94 branches throughout Australia and New Zealand.
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