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Platts for Global Grain Asia 2016: Key drivers of Australian wheat export prices

Key drivers of Australian wheat export prices

US futures prices and foreign exchange fluctuations feature highly on the list of things to check every morning for typical wheat traders across Asia, but how important a role do these actors really play in determining the daily spot prices of Australian wheat exports?

Chicago still matters

In spite of them describing very different things, front-month CBOT futures for SRW have shown a 74% correlation with Platts’ daily reference price for Australian APW-grade wheat exports, in the two months since it launched.

Besides being a strong driver of trader sentiment on a daily basis, CBOT futures are used by a number of Asian millers purchasing Australian wheat on a “futures + basis” formula.

Perhaps contributing to the correlation is the fact the basis often seems “sticky,” as millers tend to have a clear target in mind when negotiating a premium over CBOT. The basis often fails to offset sharp movement in the futures with a matching inverse trend.

Forex fickleness

Currency is no less important for Australian wheat, despite a tiny 8% correlation to Platts APW over the same period. The Australian wheat export market is highly competitive, and so to fight for business, traders faithfully adjust their USD-denominated offers to Asian millers on an FOB basis in line with forex movements.

Of course, AUD-denominated track replacement prices and downstream CFR prices can both move Australian export prices, but assuming both of these are steady, forex becomes the single biggest market mover.

Millers’ profitability is also of course heavily dependent on the strength of their local currency against the greenback.

Ever closer neighbours

Beyond these two lead indicators, prices can of course be pushed around by a whole host of other factors, including, naturally, prices of other-origin wheat into Asia.

Canada and the US are old-time adversaries in the Asian basin, holding strong market shares into Japan, South Korea, the Philippines and Thailand, but Russia has been the biggest recent threat, slowly chipping away at Australian prevalence in the blends of price-sensitive Southeast Asian flour millers.

In Late 2015, French and Argentine wheat also made unusual forays into Asia, partly thanks to lower dry bulk freight rates, which have lowered barriers to entry in the global wheat market, and to weaker currency in exporting countries which have increased their competitiveness.

Slots less troublesome

On the other hand, sporadic sharp discounts seen in the past for Australian seaborne wheat due to the prevailing shipping slot system have receded this year thanks to a substantial reduction in the penalties applied for not fulfilling a specific laycan.

In previous years, exporters could face having to pay up to $40/mt for not doing so, which occasionally resulted in them offering sharp discounts on wheat to their customers.

This season, the dearest penalty for non-usage of a slot is about $9/mt, and slots-related discounts for FOB cargoes (compared with the cost of purchasing wheat from the upstream Australian “track” market) have shrunk, and all transactions now tend to occur within $2-3/mt of the prevailing export price.

However, the Australian wheat export market remains extremely competitive and since the start of this marketing year, the export price has remained about $3-7/mt below replacement value.

Given how strong an influence futures and forex have on Australian wheat prices, it is perhaps no surprise how rigid the morning routine is for Australia and Singapore-based seaborne wheat traders, but in a world of cheaper oil and freight, new arbitrages are never far from opening and the value of global market intelligence should not be underestimated.

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This content is provided by Global Grain Events for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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