India on Thursday (08/12) scrapped its 10 percent import duty on wheat after droughts in the past two years depleted stocks and raised prices, a move that traders said could lift overseas purchases to their highest in a decade. (Reuters Photo/Tim Wimborne)

Australian Grain Fortunes Darken as Black Sea Targets Asia


AUGUST 04, 2015

Melbourne. Australian wheat producers are losing market share in Indonesia, its single largest customer and the world's second-biggest wheat importer, as rivals from the Black Sea take advantage of a bumper crop and lower transport costs to undercut prices.

Australia, which sold $1.19 billion ($870 million) of wheat to Indonesia in 2014/15, has traditionally supplied around 60 percent of its near neighbor's imports due to a freight advantage and the reliability of its quality and supply.

But Russia and the Ukraine, which grow more than three times as much wheat as Australia, are aggressively marketing at lower prices, putting a spotlight on Australia's higher output costs and ageing rail network.

Rated as the world's most expensive country to produce wheat, Australia has already lost market share in the Middle East to the Black Sea region and the challenge has shifted to its back yard.

"It is now cheaper to ship a tonne of wheat from Odessa into Indonesia than it for us to send a shipment from just west of Swan Hill to our facility in Geelong," said Mark Palmquist, managing director and chief executive of grain handler GrainCorp.

The 370 km (230 mile) inland journey in the southern state of Victoria compares with an 11,500 km (7,150 mile) 20-day sea voyage from the Black Sea to Jakarta. Australian wheat then faces shipping costs for the 3,000 km journey to Indonesia.

Black Sea wheat is being sold at prices as low as $210 a tonne, traders said, more than $30 cheaper than Australian supplies.

The discount in part reflects strong production in Ukraine and Russia, which the US Department of Agriculture (USDA) estimates jumped more than 13 percent to nearly 84 million tonnes last season.

Black Sea wheat exports have increased after Russia removed a ban on shipments related to earlier sanctions against it, and have so far been unaffected by tensions with Ukraine.

Further expansion is underway, helped by an improvement in yields, with Australia's chief commodity forecaster tipping grain production in Ukraine, Russia and Kazakhstan to roughly double to 200 million tonnes by 2019.

At the same time Australia's traditional freight advantage of more than $10 a tonne is being eroded by a fall in global freight rates and spending on new Black Sea infrastructure such as rail lines and ports, driven mostly by foreign investment.

The Black Sea has in the past provided less than 5 percent of Indonesia's imports, due to both concerns about quality, as well as price.

But traders said the big price difference meant millers were looking to buy cheaper wheat from the region to blend with Australian wheat.

"Black Sea wheat is now a meaningful part of Indonesian millers' mix," said Andrew Crane, chief executive officer of CBH Group - Australia's largest grain exporter. "Our freight advantage is not enough."

Aging infrastructure

A 2014 report by Rabobank pegged wheat production in Australia as the world's most expensive at nearly $150 a tonne, due to greater input and labor costs, and high domestic transportation costs.

"There's no doubt that Indonesian millers are taking more Black Sea wheat than before," said Greg Harvey, managing director of Interflour Group, one of Indonesia's largest wheat importers.

Australia's biggest exporters, cooperative CBH Group and GrainCorp have each committed millions of dollars to address the transport issue in an effort to improve returns to farmers and boost planting.

They face an ageing rail network that has driven up costs and driven about half of grain transport on to roads, as well as governments reluctant to spend more public funds on rail.

"Australia is now heavily reliant on Asia, and in particular Indonesia, and with an expected low freight environment expected to continue, suddenly Australia looks vulnerable," said an executive at a Middle Eastern and Asian miller, who spoke on condition of anonymity.