Australian Premium White wheat prices are ending the year at a peak level, striking a three-year high of $291/mt FOB Kwinana on Thursday December 20, the highest price since S&P Global Platts started the assessment in November 2015.
Drought-hit eastern Australia has slashed overall wheat production in the country, despite a record harvest expected in Western Australia. Australian wheat fundamentals for 2019 will likely hinge on lower output in the country and stronger demand from drought-hit East Coast, where majority of the domestic demand is concentrated.
The market will see some tightness in higher grade wheat, while higher proportions of feed grade could widen grade differentials further. Competition between domestic and international demand will be a key theme driving trading strategies and shaping price trends in the first half of 2019.
PRICES UNLIKELY TO SOFTEN ON LOWER OUTPUT AND STRONGER DOMESTIC DEMAND
Wheat production in Australia for 2018/19 harvest year is forecast at 16.95 million mt, down 20.2% from the previous year, and the lowest since the 21.42 million mt crop in 2008/09, according to the latest Australian Government Department of Agriculture and Water Resources, or ABARES, report.
Nonetheless, there is hope for the country as it expects a record wheat crop in Western Australia with ABARES estimating the region to account for 56% of the national output in 2018/19, compared with an average of 36% in the 20 years to 2017/18.
Inter-state wheat movement from the west to the east will persist in the upcoming trading year as domestic feed grain demand remains strong, with feed millers keen to secure consistent supply.
As a result, buyers in Southeast Asia will continue to face intense competition from Australian feed millers, especially as Black Sea wheat is starting to run out for the current marketing year, limiting SEA buyers purchasing option on the origins.
BATTLE OF THE ORIGINS IN SOUTHEAST ASIAN WHEAT MARKET
The Australian fundamentals will be driven by the grade proportions of wheat as the market expects higher volumes of low grade wheat and shortages of high protein as late rains and damage from a frost event in September hindered crop development and production.
Wheat protein levels were diluted with market expectation for low protein wheat to be higher year on year at around 40%-50% for 2018/19. The rain event had also hampered the quality and resulted in sprouting of higher protein wheat in the east coast.
Higher-than-expected production of Australian Standard White and feed wheat coupled with a good sorghum harvest, which can substitute feed wheat, will put some downward pressure on feed prices. This will attract demand from SEA feed buyers, especially with reducing feed supply from the Black Sea as its marketing year comes close to its end.
In recent weeks, the grade differential between APW and ASW, feed grade wheat, has widened to approximately $20/mt from previous $5-8/mt range. The spread between APW and feed grade wheat is indicated even wider at approximately $25/mt or more.
On the other hand, demand for high protein wheat is likely to outpace supply, which will widen the price spread between high and low protein grades.
As Black Sea reaches closer to the end of its marketing year, buyers in SEA are searching for cheaper alternatives. However, potential origins that can substitute the region's Black Sea wheat demand, such as Argentina and Pakistan, face quality issues.
At the same time, the region's inelastic demand for APW in making noodles and steamed buns means its demand will stay for the time being, and that buyers will have to pay up to meet their necessity.
Many end-users in SEA are currently considering containers instead of bulk vessels to minimize total cost on future purchases. Nonetheless, bigger consumers will eventually have to book bulk vessels to meet their requirements, sources said.
"In SEA, there is rationed demand and there is bare inelastic demand. When domestic prices are so strong, there is little room for negotiation. So these buyers will eventually start booking at market levels, though there will be some traders that will continue discounting to use up their slots," said a trader in Australia.
For hard wheat, however, Australian producers will face strong competition from more competitively priced wheat from the US and Canada.
The shortage of hard wheat in Australia has thinned the liquidity of the product, with AH2 offers difficult to come across in the market.
The spread between AH2 and APW is at a historical high of $50-60/mt, with a possibility of further rise once harvest and grade optimization are complete.
Traders said blending of grades is increasingly expected in order to meet buyers' specifications given higher proportion of low protein and shortages in the high protein wheat.
CHINA'S BARLEY PROBE SPOOKING WHEAT TRADE
Buyers in China have substantially increased booking of barley cargoes on the expectation that its government will begin the dumping probe on Australian barley imports during the January-February period.
As a result, shipping out of Australian ports is expected to be at record pace with potential logistic issues and delays arising.
"Logistics is going to be a mess, partly due to delayed harvest, and partly due to barley being pushed out before the official commencement of the barley dumping probe," said the Australian trader.
