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Australian Dollar Strength Knocks Wheat Sales

Australia’s strong dollar has made grain from the world’s fourth-largest wheat exporter costly for foreign buyers just as a new harvest begins, boosting the risk of overflowing silos and falling prices.

Indonesia, Australia’s largest wheat customer, is shunning Australian wheat in favour of more competitively priced Black Sea-origin grain.

“The Australian dollar’s strength is going to create challenges for exporters, although for some specific qualities, such as hard wheat, there’s always going to be some demand,” said Wayne Gordon, a grains analyst at Rabobank in Sydney.

With local prices running around a third less than a year ago, and barely covering the cost of production in some cases, farmers are also reluctant to sell, betting instead on a recovery as large Northern Hemisphere stocks get whittled down.

“The tone out there is that they don’t want to sell but that’s not always the case, as some need the cash,” said Brett Stevenson, chief executive of Sydney-based commodity consultancy Market Check.

The situation promises to be a major headache for exporters already struggling with up to 3.4 million tonnes of grain left over from the last season as farmers start reaping a crop that could amount to as much as 23 million tonnes, the country’s best since 2005-06.

Australia’s currency has been propelled higher by rising commodity prices, while the U. S. dollar has been declining.

Now trading around 92.50 U. S. cents, the Australian dollar is more than one-third higher than a year ago. Rising domestic interest rates and improving commodity prices means it could soon reach parity with the greenback, some currency experts suggest.

“If the Australian dollar reaches parity then Australian Securities Exchange futures should more closely track Chicago prices,” said David Watson, senior risk manager at FCStone Australia.

But Chicago prices themselves have consistently stayed at a significant premium this year to prices for wheat from other origins, making such an outcome unlikely to benefit Australian wheat exports much.

FALL IN PRICES NOT SUFFICIENT

Australian wheat prices fell from above A$250 per tonne mid-year to around $230 per tonne as the country’s currency strengthened but the fall hasn’t been enough for its wheat to become competitive, even in nearby markets.

Australian Premium White (APW) for January delivery is being offered free on board (f. o. b.) on the west coast for $216 to $219 per tonne. Add $30-per-tonne freight into Asia, then landed values are above $240, compared with around $230 per tonne for Russian wheat of similar quality.

A year ago a much weaker Australian dollar made the country’s grain extremely competitive, unleashing a surge in export demand that choked the country’s grain ports, which were unprepared to deal with such a large flow.

This season the scenario has reversed, with buyers in no rush to lock in Australian wheat supplies as a new crop is harvested.

“Prices are going to remain under pressure, at least in the first half, but by March Northern Hemisphere supplies would have been chewed through to some degree, so prices could pick up,” said Rabobank’s Gordon.

The USDA estimated in October that the global stocks-to-use ratio was 25 per cent above the five-year average following bumper harvests boosting stocks from a 30-year low struck at the start of the 2008-09 marketing year.

Australian traders estimate up to 18 million tonnes could be available for export in the marketing year that began on Oct. 1, up from the previous year’s 13.4 million export surplus.

The rise in stocks comes at a time when better crops in some importing countries such as Iran, Morocco and Pakistan have reduced the need for imports. The USDA expects world wheat trade to decline 11 per cent to 125 million tonnes in 2009-10.

“The export market is becoming a smaller pie so it will be more difficult to win sales,” said Rabobank’s Gordon.

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