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Rabobank warns farmers that Black Sea wheat will keep flowing

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Rabobank has warned the Australian wheat industry there is no end in sight to erosion in market share in South-East Asia after a plunge in exports to start the year.

The global agribusiness specialist said Canada and the United States were also exposed to the new world order in wheat created by the rise of the Black Sea region.

US Wheat Associates, which recently attacked President Donald Trump for shutting its farmers out of free trade deals, expects Russian wheat exports to hit 36 million tonnes in 2017-18, 29 per cent up on last year and 70 per cent above the five-year average.

Rabobank said the rise of Black Sea was not a short-term phenomenon and urged Australian suppliers to rise to the challenge by focusing on their value proposition.

Australian wheat was labelled “uncompetitive” in South-East Asia after exports for January fell by more than one million tonnes on past years.

Sales to Indonesia plunged despite forecasts that total demand from the near neighbour and world’s biggest wheat importer would increase by 23 per cent to 12.5 million tonnes in 2017-18.

Analysis by Rabobank shows Australia’s market share in South-East Asia fell from 60 per cent to 40 per cent in the five years to 2016-17 with more pain to come.

Wheat from the Black Sea region – Russia, Ukraine, Kazakhstan and Danube River countries – has been landing in South-East Asia at $US25 to $US40 a tonne cheaper than Australian wheat.

Rabobank grains analyst Cheryl Kalisch Gordon said growers in those countries would continue to make profits even at low prices created by their contribution to a glut in world supply.

“Our research found that while some of the drivers behind the growing dominance of BSR (Black Sea region) wheat in markets will wax and wane, others are set to persist, especially in light of growing investment in the region,” she said.

“And it is the volume and price of Black Sea-origin wheat in Australia’s traditional and major markets in SEA that is cause for concern.”

The Australian Export Grains Innovation Centre estimates that on-farm costs of production are about $121 a tonne in Russia and $133 a tonne in Ukraine compared with $216 a tonne in Australia.

Relative currency differentials and freight rates are expected to move in favour of Australia, but Dr Kalisch Gordon said this would not be enough to significantly change the competitive positioning of BSR wheat.

The sliver lining is that South-East Asian wheat demand is forecast to grow at an annual compound rate of six per cent to 2025.

Dr Kalisch Gordon said that regardless of the strong demand fundamentals, Australia “can’t win as a low-cost supplier to the SEA”.

“As such, there needs to be a focus on capturing the value of Australian grains, by delivering a product that is superior in terms of milling, baking, and manufacturing, but also customer service,” she said.

GrainGrowers chief executive David McKeon said the Australian wheat industry needed to co-ordinate its approach to improving its standing as a premium supplier to South-East Asia.

Mr McKeon said a big drop in wheat production from last year’s record high had contributed to a slow down in exports.

He said it was not in the best interests of growers to try to match Black Sea prices at this time and that more lucrative market opportunities would emerge as the year wore on.

https://amp.afr.com

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