Traditional wheat exporters will face a swelling tide of Russian wheat exports in the coming years, according to a new report.
The Australian Export Grains Innovation Centre (AEGIC) is forecasting 32.5 million tonnes of exports by 2030, up 50 percent from the 21.7 million tonnes Russia shipped last year.
“Increased grain production and exports from Russia are likely to lead to increased competition in Australia’s key grain markets and ultimately lower farmgate prices for grain,” stated the report.
Increased production will also reduce the likelihood of Russia implementing price-boosting export bans in the future.
Neil Townsend, senior market analyst with FarmLink Marketing Solutions, said Canada will likely lose market share to Russia in the coming years.
However, it is not a foregone conclusion that Russia will be able to boost wheat exports by 10.8 million tonnes over the next 15 years.
“It is always an inch away from being a basket case,” he said.
There is too much uncertainty, volatility and political upheaval in the market to count on a steady and stable increase in exports of any commodity.
On the other hand, he said Russia has a lot of land that can be brought back into production, fertile soil, the potential for big yield increases and plenty of incentives for investment in food production, so an increase of that magnitude is not out of the question.
Russia’s lower production and supply chain costs are the biggest reason why exports are expected to continue blossoming.
“That gives Russia, along with its similarly competitive Black Sea neighbours, a powerful competitive advantage against Australia and North America when targeting price-driven markets,” said the AEGIC report.
The proximity of the wheat growing areas to Russia’s Black Sea ports and short sailing times to key markets in the Middle East and North Africa mean the total cost of growing Russian wheat and getting it to market is about half of what it is in Australia.
“Russia enjoys a powerful competitive advantage in the MENA (Middle East and North Africa) region,” stated the report.
Buyers in that area can’t justify paying a substantial premium for Australia’s better quality wheat.
Townsend said Canada ships a fair amount of wheat to markets such as Saudi Arabia, Dubai and the United Arab Emirates but not to places like Egypt, Iran, Iraq, Tunisia, Algeria and Morocco.
He thinks Russia will be a bigger threat to Canadian wheat in markets such as Sri Lanka and Nigeria.
The report said today’s cheap ocean freight rates are allowing Russia to make inroads into price-conscious markets in Southeast Asia, where it has earned a reputation for providing cheap, functionally acceptable wheat.
“Certain markets such as Indonesia are likely to increase their purchases of Russian wheat, whereas other markets such as Japan or South Korea are less likely to buy Russian wheat for milling in the short to medium term.”
Townsend said it would be a serious blow if that happened because Indonesia is a critical market for Canada.
“You don’t want to see that market being lost to Russia and Ukraine, and it is possible,” he said.
The days of Canada wooing millers with its superior performing varieties are over, said Townsend. Millers have learned how to work with all sorts of varieties and quality characteristics. It’s all about the bottom line these days.
“Ninety percent of the world market barely cares if it’s Canadian, Russian, Ukrainian, American or whatever. It’s indistinguishable now,” he said.
Black Sea wheat used to be a joke.
“Ten or 20 years ago, maybe (a buyer) tried a cargo of Ukrainian wheat and they were tired of fishing the car doors out of it or whatever.”
Ordering wheat from Russia was a huge risk because of logistical and quality problems.
“Now when people order from Russia, it shows up on time and it’s what you bought. You can’t complain about that,” said Townsend.
The AEGIC report said a series of actions were required in order for Australia to fend of the looming competition from Russia.
It recommended an increased commitment to research and development, investment in supply chain infrastructure, continued monitoring of developments in the Black Sea region and funding market development efforts.
Townsend was less optimistic.
“What can Canada do? Nothing,”
Townsend said the wheat market is becoming increasingly focused on the bottom line, where Russia has a distinct advantage because of its dramatically lower production and supply chain costs.
That will eventually force Canadian growers to focus on higher-value crops.
“I think you’ll see over time less acres devoted to wheat,” he said.