Which wheat markets can expand for Argentina in the coming season?

Which wheat markets can expand for Argentina in the coming season?

Russian wheat continues to impose the downward trend in Chicago, although significant production cuts are projected for the new crop. Australia falls sharply in production and exports, which could leave a window open for local wheat.

The trend in Chicago: downward pressure on large export supply from Russia and weak US committed volume

Chicago continues to show a negative trend in the wheat market. Russian grain has become very competitive, with prices displacing some of the wheat from the US and other key exporting countries.

Beyond the war and initial fears over the logistics of wheat from the Black Sea area, Eurasian wheat continues to find foreign destinations. Russia is projecting September grain exports of 4.9 million tonnes. Russian exports from 1-18 September were 27% higher than the same period last year. According to analysts, the main buyers for this period were Egypt and Iran followed by Indonesia.

Prices of course oscillate from day to day as new updates on the conflict or new purchases of US wheat boost prices but wheat supply remains high, and cheap sales of Russian and Ukrainian wheat keep prices heading downwards.

Wheat forecasts for Argentina

According to GEA BCR, the poor conditions at the time of sowing consolidated a new year of fall in the sown area, reaching a minimum of the last 8 years with 5.4 million hectares at the country level.

Regarding production estimates, they were recently adjusted downwards to 15 million tonnes due to the scarcity of rainfall for the crop. In fair to poor conditions there are almost 2 of the 5.4 million hectares planted with wheat in Argentina, so if the necessary rains are not consummated in critical areas, we could expect further production cuts.

The 2022/23 Argentina wheat season was the lowest in terms of production since 2015/16. While domestic purchases have remained in line with historical levels, exports suffered from the severity of the drought.  With an export estimate for the whole season of 3.65 million tonnes, the season is expected to end with the lowest volume exported since the 2013/14 cycle. During the last ten seasons, the main destination for Argentine wheat exports has been Brazil, which on average has bought just over 4 million tonnes per season. During the last five seasons, excluding the unsuccessful 2022/23, the neighbouring country has bought – on average – 5 million tonnes from Argentina, followed by Southeast Asia and North Africa as the most important buyers.

The Asian market is mainly supplied by Australian wheat. However, Argentina sees increased opportunities in these more distant destinations when Australia has poor production seasons. The main buyer in this area is Indonesia, which during the 2018/19 and 2019/20 seasons bought 1.9 and 2.6 million tonnes respectively.

Indonesia is also the main buyer of Australian wheat, a country that has had very good harvests in recent seasons, so it has had no major problems in supplying this important market in the region. In fact, Australia has exported – on average – no less than 27.9 million tonnes in each of the last three seasons, according to the USDA. However, production cuts are expected on Australian soil and globally for the incoming 2023/24 season. In fact, for the seven major wheat exporting countries (including Argentina), exportable volumes are projected to fall by almost 9%.

So, there could be the possibility of increasing exports again in these markets of interest to Argentina, where it has already participated with large volumes, and continues to do so, albeit in modest quantities. However, it is also subject to the volumes that Argentina finally produces, since, if the harvest continues to shrink, Argentina’s FOB prices tend to rise, complicating competitiveness in more distant destinations with more concentrated sales to Brazil.

What is happening in Australia?

Recently, the Australian environment ministry declared that the country would be affected by the El Niño phenomenon, expecting high temperatures and dry weather, increasing the risk of fires. This situation could complicate wheat production.

Australia expects a year-on-year drop in production of 36% according to Australian government projections or 34.4% according to the USDA. It comes from three consecutive seasons breaking wheat harvest records, but the production projections for 2023/24 are 26 million tonnes, and we would already start with a local stock that would be 34% below the average, placing the projected supply for the following year at 28.8 million tonnes, below the average of the last ten years and 10 million tonnes less than the average of the last three seasons.

If we look at the last three seasons, Australia accounted for an average of 20% of the exports of the group of the 7 largest wheat exporters, trading 32.5 million tonnes abroad in 2022/23.

The drop in Australian supply for the next season may leave part of the Asian market without fully meeting its demand, mainly countries such as Indonesia, Vietnam and South Korea. Australia has recently suffered some years ago a scenario of production stress due to the El Niño phenomenon, which has gone down in history as the “Black Summer” that destroyed an area the size of Turkey in the 2019/20 season and claimed several lives due to the fires, leaving little margin for wheat exports.

Argentine wheat exports to Indonesia during 2019 and 2020 soared by 125% with more than 2 million tonnes of wheat being shipped to the Asian country in each of those years. In this sense, the lack of Australian wheat and the good local harvest boosted sales.

If we analyze the scenario for the new season, according to the USDA, Australia would export 19 million tonnes, 41% less than in 2022/23, and the demand for wheat from Indonesia would amount to almost 10 million tonnes, while, for the whole of Southeast Asia, the projected consumption would be 24 million tonnes. Last year, Australia exported 32 million tonnes, so for the new season, the South Asian market would be partly undersupplied, perhaps providing an opportunity for local wheat.

Source: https://bcr.com.ar/

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