Grains Research and Development

Date: 02.05.2016

Quality a buttress against Ukraine's export drive

Author: Catherine Norwood

Portrait of Ross Kingwell

AEGIC chief economist Professor Ross Kingwell: forewarned is forearmed.

Ukrainian wheat has the potential to displace Australian exports in key South-East Asian markets, according to analysis conducted by the Australian Export Grains Innovation Centre (AEGIC).

AEGIC has released a major report into Ukraine’s wheat export industry, Ukraine: An emerging challenge for Australian Wheat Exports.

This report, covering the Ukrainian wheat industry and the implications for Australian exports in nearby markets, comes from a detailed analysis by Professor Ross Kingwell and his team.

Professor Kingwell says Ukrainian wheat exports have already begun to enter Australia’s key South-East Asian markets.

“We found that Ukrainian wheat exports are currently a modest threat to Australian exports, but their potential threat is large,” he says.

“Ukraine’s competitiveness is underpinned by greater rates of yield advancement and greater cost efficiencies in their grain supply chains (Table 1). Over the next decade, these advantages will undermine Australian price competitiveness.”

However, Professor Kingwell says Ukraine is less able to reliably satisfy the wheat volume and wheat quality needs of end users in Asian markets when compared with Australia.

“It’s a tide, not a tidal wave. The Australian wheat industry has time to plan and coordinate a useful response, and we should use this opportunity wisely,” he says. “Forewarned is forearmed: Australia needs good information about its emerging competitors in order to increase the chances of good strategic decisions being made by Australia’s grains industry.

“We need to understand what characteristics of Australian wheat make our wheat preferred in our main markets, and then convey that market information to the Australian stakeholders whose reactions can help increase returns to Australian wheat producers.” The report is available at the AEGIC website.

Discussions at the Global Grain Asia conference in Singapore in March also highlighted the risks of lower global freight rates eroding Australia’s freight advantage to South-East Asian markets. With a global oversupply of shipping capacity and the fall in fuel prices, some operators are transporting cargoes at less than cost to keep their vessels working.

A presentation from Ukraine-based grain trader Okana Starin, from Leader Trading Commodities, showed Ukraine is closing the gap on Australia in terms of volumes exported. Her figures showed Ukraine wheat exports of 11.2 million tonnes in 2014-15 and 15.5 million tonnes in 2015-16, compared with 16.6 million tonnes in 2014-15 and 18 million tonnes in 2015-16 from Australia.

Major buyers of Ukrainian wheat in 2015-16 included Thailand (21 per cent), Egypt (16 per cent), Indonesia (12 per cent), South Korea (11 per cent) and Spain (11 per cent).

In a panel session at the conference, ‘Origin market focus: the fight for Asian markets’, CBH Group general manager of marketing and trading Jason Craig said there was only a $9/t price spread in Black Sea and Australian freight prices to South-East Asia. However, Australian production costs were generally much higher.

In evaluating Australia’s future role in South-East Asia, he said if Australia’s export capacity remained at current levels, averaging 19 million tonnes a year, it would not be able to maintain market share as demand increased. Projections estimate that wheat imports to Indonesia, Myanmar, Vietnam, Malaysia, Thailand and the Philippines will increase from a combined total of 21 million tonnes in 2015, to 28 million tonnes in 2020 and 39 million tonnes by 2025. There would be opportunities for Australia, particularly in emerging markets such as Myanmar.

However, Mr Craig said yield improvements in Australia were not keeping pace with increasing demand. There were signs that a reallocation of capital investment from mining to agriculture was beginning in Australia, which could help accelerate some improvements. But the key for Australia would be a focus on providing a high-quality product of higher value, he said.

His outlook was supported during a later panel discussion where two international traders based in the Black Sea region nominated high-quality wheat production from Australia as prime choices for investment in the global grains industry.

A presentation during the same session from AEGIC wheat specialist Dr Larisa Cato highlighted the quality approach for Australian grain. She said Australia invested in research and variety development targeting specific consumer needs. Innovation in processing and performance that differentiated Australian grain would be crucial to help maintain a position as a preferred supplier.

 

   Ukraine  Australia  Canada (2015 est.)
Table 1 Comparison of wheat production costs in Ukraine, Australia and Canada
  Cost ($AUD/t)
% supply chain cost
Cost ($AUD/t)
% supply chain cost  Cost ($AUD/t) % supply chain cost 
Cartage to bin
 $4.30  8%  $7.80  9% $11.40
13%
Storage  $2.90  5%  $9.00  11% $17.70 21%
Up-country handling
 $7.70  15%  $18.40  22% $16.20 19%
Transport to port
 $9.50  18%  $26.70  32% $49.80 59%
Handling at port
 $22.90  43%  $13.10  15% $10.70 13%
Shipping  $0.88  2%  $6.80  8% $4.00 5%
Levies  $4.90  9%  $2.80  3% $3.20 4%
Supply chain cost
 $53.10  29%  $84.60  29% $113.00 37%
Farm production cost
 $133.00  71%  $206.60  71% $191.00 63%
Total cost ($/t)
 $186.10    $291.20   $304  

SOURCE: AEGIC

More information:

Australian Export Grains Innovation Centre

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