Australia’s high quality of wheat and proximity to Asia has meant that for several years, growers have been the beneficiaries of consistent demand.
Following two consecutive below average production years, there has been market conjecture as to what volume of Australian wheat exports constitutes inelastic core demand, particularly from South East Asia.
The drought impacted 2018/19 harvest resulted in the smallest winter crop production in Australia for more than ten years. The majority of grain has been required for domestic use, and the subsequent high prices have restricted the usual export volumes to international markets.
Australia’s lack of offshore wheat exports, combined with a rise in consistency and production from emerging markets in the Black Sea region and Argentina, has seen our market share into Asia decrease.
Glencore Agriculture Senior Wheat Trader, Simon Gellert, says that alternate competing origins have been making up for the shortfall of Australian exports.
“Using Indonesia as an example, they alone would traditionally take 20 to 25 per cent of Australian wheat exports,” Simon said.
“The volume is considerably lower this year, with Indonesia only taking around 10 per cent with a similar theme into other Asian export homes.
“This, paired with the drop in production makes for a significant decrease.
“We expect to see just under one mMT exported this marketing year compared to a four mMT yearly average over the last five years.
“It is the lowest market share we’ve had in several years. The shortfall has seen an increase in volumes from Argentina and the Black Sea going into Asia.
“These competing origins are improving their farming practices, increasing production and have a large export capability.
“For example, Argentina is forecast to produce a fourth consecutive record wheat crop this harvest of around 20mMT.”
Australian wheat has a reputation for its exceptional quality and producing flour with characteristics that make it a highly sought after product, particularly for specific end users, such as noodle manufacturers. However, consecutive drought impacted production volumes has meant high prices over an extended period, making Australian wheat unviable for many end users in Southeast Asia.
According to the Australian Bureau of Agricultural and Resource Economics, competition is likely to continue for Australian wheat exports, particularly in the price sensitive Asian countries due to increasing acceptance by Asian consumers of food products created using non-traditional origin wheat.
While the quality and functionality of grain from these emerging markets is lower compared to Australian wheat for specific end use products like noodles; a sustained period of high prices has forced bakers, millers and other end users to adapt to using these cheaper alternatives in order to remain competitive.
Simon says it is unknown whether Australia has reached its lowest market share, or if it will continue to fall, with the 2018/19 season highlighting the fact that it is only our noodle wheat exports to Korea and Japan that are, at this point, truly inelastic demand.
“Australian wheat has lower moisture than other origins and we’re geographically situated to suit just in time inventory and short transit times with large parts of Asia,” Simon said.
“Many of our traditional buyers will continue to minimise the use of Australian wheat in their milling grists while our prices remain elevated.
“As we rebuild our national stocks back to more comfortable levels, the function of the market will be to lower prices to become more export competitive.
“Historically, Australian wheat has had a premium into Asia versus other origins. However, as our traditional buyers have become accustomed to using these alternate origins we can’t assume that we will again enjoy these same premiums; that is to say at a given price spread we are likely to see demand for Australian wheat permanently affected.”
While global production looks to rebound for the 2019/20 season, major wheat export countries have drawn down on their stocks.
Looking forward to 2023, the Australian Bureau of Agricultural and Resource Economics expects world import demand to continue increasing in line with population growth, changing diets and rising incomes.
Prices are expected to fall over this time though due to production increases in markets such as Argentina and the Black Sea region outpacing global demand.
“We’re noticing a change in the flow of global commodities due to production growth,” Simon said.
“Although there are new, high yielding varieties of wheat being developed and released in Australia, Asian countries’ consumption is growing at a rate that exceeds our production.
“For Asia to meet their required grain demand, they will have needed at some point to source grain from additional markets, regardless of conditions here.”