Shrinking freight costs, a weaker local currency and a bumper crop may give Australian wheat this season a chance to make inroads into new and distant markets so far dominated by European and US supplies.
Analysts said this situation would likely help the country's wheat exports to recover by at least 90 percent from the last season, when a drought-decimated crop slashed sales to around 7 million tonnes, down about 36 percent from the year before, lifting world prices to a record above $13 a bushel.
The new-found competitiveness of Australian grain comes at a time when the country for the first time has allowed global traders to export bulk wheat cargoes, breaking away from a previous regime under which exports were channelled through AWB. "The good news for Australian growers is that lower freight rates should extend the reach of Australian grain in international markets," said Peter Jones, general manager, marketing, for grain handler and exporter ABB Grain Ltd.
Jones's firm exports grain to 14 countries and has recently started bulk exports, following the deregulation of the export industry which ends AWB Ltd's six-decade long monopoly after a scandal involving illegal payments in Iraq. The financial turmoil pulled down the Australian dollar to six-year lows against a basket of major currencies this week.
The currency has lost 25 percent this year against the US dollar as investors liquidated positions and commodities prices fell. Traders said Australian wheat could get a bigger share of European and North African markets where grain from Down Under has been sold only in small quantities. But competition from European and Black Sea grain would be tough.
"At the moment we're not really priced competitively into some of the north African and Middle East markets and that's mainly because there's an abundant supply out of the EU and former Soviet Union states," said Doug Whitehead, a soft commodity analyst at Australia & New Zealand Banking Corp. Nevertheless, there is potential for Australian wheat to be sold in new markets because a strong US dollar has made US wheat less competitive.
"There's a very big European crop with French wheat going into North Africa. So it is most likely that it will be niche wheat going into European markets from Australia, like durum," said Michael Pitts, a trader at the National Australia Bank.
The drop in freight has been even more dramatic. The daily hire rate on Panamax-sized vessels has sunk to as low as $5,000 per day on some routes from $80,000 a day three months ago. The Baltic Exchange's dry sea freight index has dropped to its lowest in almost seven years, approaching rates not seen since the Asian financial crisis in 1997/98. Lower shipping costs mean exporters such as ABB Grain expect to sell consignments of grain into European and possibly South America.
Grain exported to these destinations is likely to be of premium quality for use in higher value products. "North African markets is usually dominated by Black Sea and French wheat. But I think there is good scope for Australian wheat in those regions," a Singapore-based regional trader said.
MORE COMPETITION Wheat on the Chicago Board of Trade has lost 40 percent of its value since the start of the year on the back of turmoil in financial markets and bumper crops. It hit a record high of $13.34-1/2 a bushel on February 27. Australia has sold 150,000 to 200,000 tonnes of wheat from the new crop to its traditional Asian buyers, including Indonesia, Thailand and Malaysia.
Traders said the sales are much lower than 25-30 percent of the crop that is normally sold by late October because of price volatility and financial market upheaval. Australian wheat is quoted at A$315 per tonne, free on board, at the country's Port of Geraldton in Western Australia.
The country has allowed 19 firms - including Cargill, Louis Dreyfus, Bunge and Queensland Cotton Corp, a unit of Singapore-listed Olam International Ltd - to export bulk wheat cargoes from this year. Some analysts said low freight was a double-edged sword as it would lower costs in getting cargoes to new markets, but at the same time also expose Australian suppliers to more competition in markets they traditionally serviced.
"Probably the freight spread between a long route and a short route is not as great as it was when we were at the height of the commodities market. That means freight rates from other origins have also got smaller," said Michael Hein, head of trading at Elders Toepfer.
Australia's 2008/09 harvest is gathering pace with a crop of about 20 million tonnes expected, out of which about 14 million is likely to be exported, maintaining Australia's position as the world's second-largest exporter after the United States.
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