Kazakhstan, Russia and Ukraine have their sights set firmly on Asia
Australia’s traditional wheat markets in the Middle East and Asia are under threat from the Black Sea nations of Russia, Ukraine and Kazakhstan.
Australia’s Middle East markets were always likely to be threatened by increasing competition from Black Sea wheat due to their relative proximity to Europe. But Asia – particularly South-East Asia – has long been the domain of Australian wheat, helped by a relatively large freight price advantage able to fend off competition from Europe. Lower oil prices, a slowdown in the Chinese economy and an increase in new ships have reduced that freight advantage, making it more competitive for Black Sea exporters to sell into Asia.
According to the Australia Export Grains Innovation Centre, based in Perth, the current threat to Australia’s wheat markets from the Black Sea region is “modest” but it may become more intense in coming years.
Indonesia, Malaysia, Thailand, Vietnam and the Philippines have been some of the biggest and most important buyers of Australian wheat for decades. These countries have traditionally been noodle-making nations and Australia arguably provides the best wheat in the world for that purpose – Australian Prime Hard.
But a gradual westernisation of diets has seen a shift to breads and other baked products in South-East Asia. The US and Canada dominate this sponge and dough bread segment.
Over the past 15 years, Australia has consistently supplied 40-45 per cent of the wheat needs of Indonesia, Malaysia, Thailand, Vietnam and the Philippines.
The few exceptions have been during drought-ravaged years, when Australia has struggled to export enough wheat to its regular customers.
And in bumper seasons, such as 2012-13, when a massive 24 million tonnes of wheat was shipped out of the country, Australian exports accounted for 63.8 per cent of the South-East Asian market.
But in 2014-15, Australian exports to the five main buyers in the region fell to 37.7 per cent. The less-than-average shipments to South-East Asia that year indicate an undercurrent of competition.
There is an increasing view that Black Sea wheat exporters are encroaching into Asia. According to AWB/Cargill pool manager Charlie Brown, Black Sea exporting nations are competing in all markets. Mr Brown says Australia long held a freight advantage into Indonesia over the Black Sea ports of about US$12 a tonne. “But that freight advantage has decreased by US$4-5 a tonne from five years ago,” Mr Brown says.
Yet freight rates are not the only consideration: the actual wheat price is the other reason.
Mr Brown says Ukrainian wheat is about US$50 a tonne cheaper than Australian wheat. “Once you take freight into consideration, in round numbers, our wheat landed into Indonesia is priced about US$40 a tonne above Ukrainian values,” he says. “It is not like-for-like wheat, though.
“The growth (in the Asian market) has come from lower quality flour. It has not come from higher quality flour, where we fit the bill.”
Mr Brown says the reliability and quality of Black Sea wheat is improving.
“We (Australia) used to be a pace setter (in Asia),” he says. “But we’re losing a bit of our grasp on the premium in these markets because the quality of the alternative is improving.
“The Black Sea countries have played catch-up quite quickly in the past 10 years.
“Our quality is still there but Asian flour millers have become better at blending wheat of different qualities to meet their needs.”
The Black Sea region has become a powerhouse in wheat exports during the past 4-5 years.
About 20 years ago, Russia, the Ukraine and Kazakhstan were annually exporting 5-9 million tonnes of wheat from harvests of 60-80 million tonnes. But in the past five years, the Black Sea region has produced crops of 100-115 million tonnes – enough to produce an exportable surplus of 40-49 million tonnes.
During the past two years, a decline in the Russian rouble and the Ukrainian hryvnia against the US dollar has also given a boost to Black Sea sales. Australia Export Grains Innovation Centre researchers, led by chief economist Professor Ross Kingwell, have completed an extensive study of the Ukrainian wheat industry and are soon to release a similar study on the Russian industry. A report on Kazakhstan is due by the end of the year. All three Black Sea countries are different.
Ukraine has an arable area similar to Australia, but its deep, rich, highly productive black soils are the envy of grain farmers around the world. AEGIC says the rich soil types allow Ukraine to grow a variety of crops, including canola and corn, not just cereals. Grain production in Kazakhstan, on the other hand, is largely focused on wheat.
Professor Kingwell says Russia produces about 100 million tonnes of crops, of which wheat accounts for about half. He says all three countries are still emerging out of Soviet-style systems, not only with equipment but also labour. “Under the Soviet system, the farm workforce all had certain jobs to do,” he says. “Now, they are more multi-skilled.”
While the three Black Sea countries can produce big wheat crops, their biggest obstacles are overcoming poor rail and storage infrastructure and corruption.
AEGIC says truck queues at Ukrainian ports often stretch 30km and waiting times of 24 hours are common.
“Recently initiated investments by multinational grain traders and large local agribusinesses in new grain terminals at ports and on inland waterways are liable to lessen queuing costs and lower export grain supply chain costs,” the report says.
But getting the investment to improve Ukraine’s export ability is not easy. Theft, fraud and corruption are believed to be endemic in the country – right down to the farm level.
“However, through greater use of e-commerce, monitoring technologies, third-party appraisal services and by removing certain human approval processes in the export of grain, the costs of corruption are being gradually stripped out from Ukraine’s export grain supply chains,” AEGIC says.
That means by 2035 Ukraine is expected to be exporting 50 million tonnes in its own right.
Professor Kingwell says the Russian Government has already made it clear it sees its wheat export future entrenched in Asia.
To counter this increasing threat to Australia’s markets, he says the Australian grain industry would be better served if it collated, monitored and analysed information out of the Black Sea region. Plus it needs to continue to develop higher yielding wheat varieties with qualities targeted to customers’ needs.
AEGIC also sees the need for Australia to develop an “industry good” organisation to accumulate data on customers’ needs – an issue that has dogged the industry since the sale of AWB to foreign interests and the collapse of the Grains Council of Australia in 2010.
The AEGIC report says Australia has a “grace period” to get its act together before competition from Black Sea exporters and those from other countries erode its markets.
“Failure to act strategically will cause a rapid erosion of market share in Australia’s principal markets and strip value from the Australian grains industry,” it says.