World Grain - November 2016 - 50

AEGIC: The Black Sea threat
Two recent reports by the Australian Export Grains Innovation Centre (AEGIC)
laid out the ferocious competitive challenge facing Australia's wheat export industry
from rival suppliers in the Black Sea.
Australia's wheat exporters traditionally have competed against those from the
U.S., Canada and countries in Western Europe - all producers with similar costs of
production. But Black Sea exporters - Russia, Ukraine and Kazakhstan - typically
operating from lower cost bases, now account for 30% of the global wheat trade
and increasingly are targeting high growth markets in Africa, the Middle East and,
of most concern to Australian producers, Asia.
According to AEGIC, the Black Sea suppliers have been aided by the slump in
bulk shipping costs, which has reduced the importance of freight to the landed cost,
and also have benefited from investment in infrastructure and better marketing and
production techniques. AEGIC warned that planned upgrades to grain supply chains
and farming practices would further improve quality and cost competitiveness.
Key AEGIC findings included:
* Major enhancements in Black Sea production processes and infrastructure
have enriched yields and reduced logistics blockages, boosting volumes available for export.
* Russia plans to expand wheat production by 25 million tonnes over the next
decade. Much of the focus will be on yield rather than grain functionality or
quality, but improvements in these areas also should be expected.
* Russian grain exports, underpinned by productivity gains at farms and the
upgrading of local supply chains, are projected to increase 60% from 2015 to
2030, with wheat exports expected to reach 32.5 million tonnes, up from 21.7
million tonnes last year.
* Russia is exporting more grain into Southeast Asian markets where its products
have slowly gained acceptance as filler wheat. It now is targeting China and
North Korea as well as North Africa.
* Ukraine's grain growers have not fully embraced modern farming methods yet,
but as they do, this will further reduce production costs and improve yields.
Investments in logistics and infrastructure by European banks and grain multinationals are cutting costs and boosting export competitiveness.
* Ukraine's wheat exports are only ranked by AEGIC as a "modest" threat to
Australia's wheat export industry at present, with exports forecast to rise 1
million tonnes by 2024 to 9.7 million tonnes. But this threat will grow as yield
and supply chain cost enhancements cut FOB costs, and volume and quality
advances increasingly meet the needs of Asian end users. Farmers could also
divert more acreage to wheat production in the future.
* Black Sea producers have a clear labor cost advantage over other exporting
nations, while other inputs such as fuel fertilizers and machinery are also available from local sources often at reduced rates. The devaluation of the Russian
Ruble and Ukrainian Hryvnia also have improved competitiveness in export
markets.
* Black Sea grains also benefit from a freight advantage over Australian exports into Middle East and North Africa markets. Australia has an advantage
on freight into Southeast Asia. However, the slump in ocean freight rates has
reduced the relative importance of freight as a percentage of the landed cost.
* Black Sea grains could in the future reduce supply chain distances by using rail
services into Asia.
* Increased grain exports from the Black Sea will exacerbate price pressure on
Australian exporters, which also will be hard-pressed by "North American
industry organizations funded to serve their Asian grain-buying customers."
Australia's market share will be diluted in some markets as a result. Farm-gate
prices are likely to fall.
50

the lower cost of moving grain from farm
to port in the Black Sea.
Peter Woods, former CEO of Wheat
Exports Australia and current head of
grain marketing company AvantAgri, said
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from favorable exchange rates, production
costs that were around half of Australia's,
and "incredibly cheap" freight rates that
had eaten into Australia's advantage in
Asian markets.
"Most importing mills will use a blend
of wheat to achieve the end product's desired qualities," he said. "So if Russian
wheat is landed cheaper, it is used to the
extent that the desired dough performance
will allow."
The high quality of Australian wheat
remained a key point of difference compared to Black Sea varieties, but that
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growers, said Ray Marshall, founding
and executive member of the W.A. Grains
Group Inc. (State) and a board member of
Grain Producers Australia. He said Black
Sea products often were blended with
Australian wheat.
"It is ironic that the higher the quality of
Australian wheat, the less they require in
their economic blends," he added.
FIGHTING THE BLACK SEA TIDE
Stakeholders told World Grain that
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Australia's grain exporting sector would
require major investment, both by private
companies and government, as well as a
reduction in bureaucracy and institutional
reform.
Marshall said Australia's high storage
and handling costs had become a competitive disadvantage "because our transportation system - road and rail - is at best
Third World and expensive. We also suffer
from high machinery and labor costs, govHUQPHQWUHGWDSHVWLÀLQJFRPSOLDQFHUHJulations and government - federal, state
and local - which has a general disregard
for agriculture.
"We are simply being priced out of the
global market and out of business, maybe
like the Australian car industry. Western
Australian growers have little capacity to
November 2016 / World Grain / www.World-Grain.com

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World Grain - November 2016

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