Wheat heavyweights battle for global market share

An Australian agricultural official asked a pointed question at a recent conference: "Are we at risk of becoming the poor white trash of Asia?"

He was quoting Lee Kuan Yew, the late prime minister of Singapore who once described Australia's potential using the same harsh words. But in this case the official was warning about Australia's status as a grain exporter.

Australia, Canada, Europe, Russia and the US are among the heavyweights battling for a piece of the global wheat market. Surplus stocks, sharp currency moves and large impending crops are reshaping trade flows of the staple grain, with winners and losers.

Aggressive sales by big exporters have pushed benchmark US wheat prices down more than 20 per cent this year to below $5 a bushel. Hedge funds have got the message, holding three bearish bets for every bullish one in Chicago's futures and options markets. "You would have to search to find something to turn the wheat market around," says Richard Feltes, vice-president at broker RJ O'Brien.

Wheat is a versatile crop, grown in a variety of climates and used in products from bread to noodles to animal feed. After years of high prices, farmers have grown two straight record harvests. A third straight year of production above 700m tonnes is on the cards, according to the International Grains Council.

Soren Schroder, chief executive of Bunge, a New York-listed grain trader and miller, says: "The decline in prices is just a reflection of the very good crop outlook everywhere. Many origins are competing against each other for the same business."

The stronger dollar has helped cut US wheat exports by 25 per cent this year, according to its department of agriculture. Once the source of a quarter of the global wheat trade, the US has seen its share slip to 15 per cent. "We're just not competitive in the world market," says Ted Schultz, chief operating officer at Team Marketing, a co-operative grain merchant in Kansas, the top US wheat-growing state.

The US's loss is others' gain. Amid weakness in its currency, Canada's wheat exports are set to match the US's for the first time ever. Last month Bunge and a state-owned Saudi Arabian investment company took a majority stake in Canada's former wheat monopoly, helping the US group diversify its sources of supply and Riyadh enhance food security as it stops growing its own wheat.

Europe has enjoyed record exports thanks to good harvests, the decline in the euro and its proximity to the Middle East, a key importing region. Archer Daniels Midland, another New York-listed trader and processor, this week announced it had taken full control of export terminals at the mouth of the Danube river able to handle wheat and other commodities from Romania, Bulgaria, Serbia and Hungary.

But it is supplies further east in the Black Sea region that have tipped the global wheat balance. The crisis in Ukraine and Russia has heightened the value of grain sales as a source of hard currency for the two countries.

Ukraine's wheat exports are forecast at 11.7m tonnes, the highest since the 2007-08 crop year, while Russia's are forecast at a near-record 21m tonnes, according to consultancy Sovecon in Moscow.

The rise of the Black Sea producers two years ago led the UN Food and Agriculture Organisation to add Russia, Ukraine and Kazakhstan to the list of five members in its "bulk wheat exporter" category: the US, EU, Canada, Australia and Argentina. "These are new players who were not there 10 years ago," says Abdolreza Abbassian, FAO senior economist in Rome.

Wheat from the Black Sea, especially from Russia, became more attractive thanks to lower freight shipping rates and the sharp fall in local currencies such as the rouble. It is even finding its way to markets near the US.

"With freight rates so cheap, Russian wheat works into both South America, for example Peru, and into Central America, such as Mexico," says Swithun Still, director at Solaris, a Swiss-based grain trader. Nigerian mills, traditionally buyers of US wheat, are also buying more from the Black Sea exporters, he said.

Wheat is not a uniform commodity. Bread bakers may prefer "hard" varieties with more protein while cracker makers seek soft wheat. As a result, some longstanding trade relationships with sources of speciality grains are hard to undo.

Nevertheless, David Fienberg, the Australian grains official who warned of "white trash" status in grains, said rival wheat exporters were working hard to gain market share in new places.

Canada, he told the conference in Canberra, was developing wheat "so that it's able to gain entry and also eventually dominate the Southeast Asian noodle market".

Australia's wheat exports are forecast at 17m tonnes, the lowest in five years, according to government data. Mr Fienberg added: "You can see the encroaching of the Black Sea exports."

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