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Asian wheat buyers in a pickle on Australian quality downgrades

The global supply of high-quality wheat is set to tighten in the first half of 2022, as the commencement of the La Nina weather phenomenon during Australia’s peak harvest period dashed hopes of the world’s fifth biggest wheat exporter meeting a bulk of Asia’s mid- to high-protein wheat demand.

Record high freight costs and disruption due to a new COVID-19 variant amid high quality wheat shortages and tight exports from some other major regions mean that global wheat prices are likely to remain elevated through first half of 2022, traders said.

Australia is expected to produce a record crop of 35-37 million mt in the marketing year 2021-2022, but widespread rainfall because of La Nina in November has resulted in significant quality downgrades across its wheat belt, with the share of its milling grade expected to fall to about 35%-45% in 2021/22, from 65%-70% in 2020/21, market participants said.

The turn of events has led Asian flour millers fretting over their supply of high-protein milling wheat, as Australian suppliers scramble to get their hands on higher grade wheat from growers to blend with lower grades and reap high price points.

The segregation ratio between milling and feed wheat remains unclear, as the grades can be blended to bump up protein levels, which in turn can be used for milling purposes.

“It’s too hard to pinpoint … all the Australian Standard White this year can be blended up to 9% if need be, so is it still milling [grade]?” a trader said.

Strategizing trade and purchase to boost value

Australia’s wheat exports are unlikely to be hit because of the quality issues, as limited supply of high-protein variety from the US and Canada, along with tight exports from Black Sea amid Russia’s export taxes and quotas, are seen leading support to a promising export season.

The country’s exports are forecast to rise to 24-26 million mt in 2021/22, from 24 million mt in 2020/21, with Australia seeking to win most feed businesses in Asia because of the wheat quality imbalance, traders said.

It will look to dominate the supply of low- to mid-grade wheat in Southeast Asia amid commitments to export noodle blends, which require higher specifications, into North Asia.

Australian suppliers, as a result, are aiming to price the ASW grades aggressively to compete against the higher protein wheat from India or Argentina in the first half of 2022, ahead of the new crop from Black Sea in the second half of the year, according to traders.

They are quoting ASW prices across a wide spectrum — from no protein guarantee feed grade to 9%, which can be used for milling purposes — to entice end-users and drive them from relying on other origins.

“There might be downgraded milling [wheat] that people are willing to use,” an Australian trader said.

Southeast Asian flour millers, meanwhile, will bear the burden of blending the bulk of their wheat purchases, while balancing between various wheat origins and protein levels to maximize value, traders said.

“At the end of the day, Australia will come back with decent pricing and the buying will continue because they are a reliable source,” a trader in Singapore said.

The dilemma over Indian wheat

India, the world’s second biggest wheat producer after China, made a comeback in 2021 with an exportable surplus of about 4-5 million mt. Almost 3 million mt of that surplus was shipped out by October, trade sources said.

It was unclear if India could maintain an export surplus in 2022/23, as the country’s production data is published only after the start of the harvest in February 2022. India’s outflows are also heavily dependent on export prices, and market participants lacked clarity about buoyant production next year.

Quality concerns have also shrouded Indian wheat, with most southeast Asian flour millers preferring Black Sea and Argentine wheat.

“On paper, Indian wheat quality is actually great,” said a trader in Singapore. “But in reality, it’s dusty and when you put it through milling process, the characteristics are not suitable for every miller.”

Some Indonesian importers bought Indian wheat in 2021, others were split between trying Indian wheat and paying for other origins, while grappling with supply shortages of high-quality wheat.

“We are hearing mixed opinions on Indian wheat,” said a flour miller source. “Some say it works, others have complained about the odor and the fiber is concerning because it can damage the milling system.”

But buyers have limited options, as Black Sea continues to be priced out, with no sign of competing until the next season starting July, and Argentine wheat exports typically start fading from March.

Source: Platts

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