What the World Wants from Australian Wheat Gordon MacAulay BRI Australia
Outline Scale of the World Wheat Industry Competition is tough Black Sea Ports Price is important Wheat markets are risky why? The nature of supply and demand Risk management is essential Our biggest customer Indonesia This market wants our wheat look after it Baked goods sector most important Baking type wheat is wanted Quality versus yield consistency Product differentiation and market servicing costs Consistency a major issue Internationalisation Economies of scale and scope and the competitive fringe 2
World Wheat Importers 000' tonnes 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Imports of Major Wheat Importers, 2004 to 2009 2004 2005 2006 2007 2008 2009 Year Source: UN ComTrade data, January 2011 Who needs wheat? Many countries. Spain Italy Algeria Brazil Japan Indonesia Germany Rep. of Korea Belgium Philippines USA Import Shares of Major Wheat Importers, Average 2004 to 2009 Other (< 2%) 46% Netherlands 4% Source: UN ComTrade data, January 2011. Spain 5% Morocco USA 3% 2% Mexico 3% Italy 6% Algeria 5% Brazil 5% Philippines 2% Yemen 2% Japan 5% Indonesia 4% Germany 2% Rep. of Korea 3% Belgium 3% 3
World Wheat Exporters Per cent 60.00 Market Share of Wheat Exports by Major Exporters 1960/61 to 2010/11 50.00 40.00 30.00 20.00 10.00 0.00 Market Share of World Wheat Exports, 2005/06 to 2010/11 (%) Argentina Australia Canada EU-15/27 United States Other Source: Derived from USDA, PSD Online, January 2011. Who exports wheat? Only a few countries. Ukraine, 5.19 Turkey, 2.14 Kazakhstan, 5.49 Argentina, 6.81 Australia, 9.43 Other, 8.53 Russia, 10.07 United States, 23.06 Canada, 14.25 EU 27, 15.04 Source: USDA, PSD Online, January 2011 4
Export and Production Shares Export share 0.60 0.50 0.40 0.30 0.20 0.10 0.00 Wheat Export and Production Shares, United States, 1960/61 to 2008/09 y = -0.0038x + 0.4407 R² = 0.4902 Source: Data from USDA, PSD Online Correlation = 0.77 Production share 0.18 0.16 0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00 Export 0.30 share 0.25 0.20 0.15 0.10 0.05 0.00 Wheat Export and Production Shares, Canada, 1960/61 to 2008/09 y = -0.0016x + 0.2275 R 2 = 0.38 Source: Data from USDA, PSD Correlation = 0.66 Production share 0.09 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0.00 Export share Production share Linear (Export share) Export share Production share Linear (Export share) Export share 0.25 0.20 0.15 0.10 0.05 0.00 Wheat Export and Production Shares, Australia, 1960/61 to 2008/09 y = -9E-05x + 0.127 R² = 0.0016 Source: Data from USDA, PSD Online Correlation = 0.68 Production share 0.05 0.05 0.04 0.04 0.03 0.03 0.02 0.02 0.01 0.01 0.00 0.20 0.15 0.10 0.05 0.00 Wheat Export and Production Shares, Black Sea Ports, 1960/61 to 2008/09 Export share 0.30 Source: Data from USDA, PSD Online 0.25 More countries included Production share 0.25 0.20 0.15 0.10 0.05 0.00 Export share Production share Linear (Export share) Export market shares Production share Note: These slides were developed for the Grain Foods CRC. Black Sea Ports include: Russia, Ukraine, Kazakhstan, Romania, Bulgaria, Croatia, Hungary and Turkey 5
Market Drivers Market Drivers World Wheat Market Long-term major drivers Population (by 2050 double food production for 9 billion) Income World Population to 2100 Yield Water/drought Competitive crops and products Technology and management Other factors???? 9.0 Predicted Average Annual Real GDP Growth 2009 to 2019 8.0 7.0 Source: IIASA (2007), http://www.iiasa.ac.at/research/pop/proj07/ 6 Developed Economies, 2.3 Developing Economies, 5.1 Australia, 2.8 Canada, 2.3 EU, 1.4 Japan, 0.8 New Zealand, 2.3 United States, 2.3 Africa, 4.3 China, 8.4 India, 7.1 Indonesia, 4.9 Malaysia, 4.6 South Korea, 3.4 Thailand, 3.9 Vietnam, 6.6 Russia, 2.2 Ukraine, 3.2 Iran, 3.2 Israel, 4.2 Saudi Arabia, 3.9 6.0 5.0 4.0 3.0 2.0 1.0 0.0 FAPRI (2010), 2010 US and World Outlook. http://www.fapri.iastate.edu/outlook/2010/
Global Wheat Markets 000 Mt or ha 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 Global Wheat, Area, Production and Consumption 1960/61 to 2010/11 Area Harvested Production MY Exports Total Consumption USDA, PSD Online, January 2011. Population growth a major driver. Area stable, yield driven. 7
Wheat Consumption and Use Wheat Consumption for Food, Seed and Industrial Uses, Selected Countries (Average 2005 to 2009) Kazakhstan Azerbaijan Algeria Iran Egypt Iraq Jordan Australia Canada United Arab Emirates Kuwait Argentina United States Saudi Arabia China India Brazil Korea, South Malaysia Japan Philippines Indonesia Thailand Source: USDA, PSD Online and US Census Burea, IDB 0 50 100 150 200 250 300 350 Consumption (kg/person) 8
Market Drivers What do you think determines the market price for wheat (milling wheat)? (Rank your answers) Exchange rate Weather Income Futures traders Supply and demand Energy prices Population growth Other.. 9
Changing World Markets 9 April 2009 1. World beginning stocks at 30 year low Stocks-to-use at historic low. Export origin supplies 43% below 10-year average. 2. Global plantings much higher on strong prices 3. Weather mostly favourable, global yields forecast up 6% Drought decreased harvests in North Africa, Middle East and Argentina Quality concerns in Black Sea and Australia 4. Record production prospect: forecast up 12% (72 MMT) from last year Some lower protein origins up: Ukraine (75%), Canadian Eastern SRW (300%), U.S. SRW (70%) 5. Imports also expected to increase: 8% (9 MMT) to record 122 MMT Stock rebuilding, increased consumption 6. Prospects for increased production seen increasing export competition Ukraine up 9 MMT, Australia up 6 MMT, EU-27 up 5 MMT U.S. exports forecast to fall 21% (7 MMT), Kazakhstan -3 MMT, Argentina -4 MMT 7. Ocean freight rates fall sharply from record high Baltic Panamax Index down more than 90% 8. U.S. wheat prices still high relative to other origins 9. Global consumption to set new record: forecast up 6% (35 MMT) Increased feed use expected in the U.S. and Europe 10. Global ending stocks expected to rebound 25% (31 MMT) 11 February 2011 1. 2010/11 Production down, but third largest wheat crop on record at 645 MMT Drought and hot temperatures cause Russian production to fall 33%, to 41.5 MMT Canadian production falls due to adverse weather, down 14% to 23.2 MMT Argentine production at 14.0 MMT, up from 11.0 MMT last year 2. Consumption sets record for third consecutive year, up 2% from 2009/10 3. World wheat trade projected at 125 MMT, the third largest amount on record 4. 2010 Plantings down sharply in U.S. due to poor weather and low prices U.S. plantings estimated at 53.6 million acres, lowest since 1969/70 SRW plantings fall nearly 30% due to an extremely wet fall 5. Prices surge due to Russian export ban, quality concerns Russia bans wheat exports through 2010/11, exports fall from 18.6 MMT in 2009/10 to 4.0 MMT in 2010/11 Ukraine implements export quota through March 31, 2011 Persistent rainfall causes major concerns about quality in Australian crop 6. World ending stocks fall 10% to 178 MMT, exporter supply falls 22% to 62 MMT 7. 2011 U.S. winter wheat plantings up by 10% 2011 winter wheat conditions remain poor due to dryness in the Great Plains 8. Competition for acres intensifies; U.S. corn stocks at 15-year low Environmental Protection Agency increases ethanol blend Global corn demand reaches record 837 MMT Source: US Wheat Associates 10
US$/tonne (nominal) 450 400 350 300 250 200 150 100 50 0 United States, All Wheat Price, Monthly Average (US$/tonne) Stocks to Use Ratio Decades (monthly data) Source: USDA price data. Nominal values. Stocks to use ratio the global thermometer. 40% 35% World Stocks to Use Ratio for Wheat Compared to Prices 400 350 300 Stocks to Use Ratio 30% 25% 250 200 150 USD per Tonne 20% 100 15% 50 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 World stocks to use ratio APW price, Newcastle Source: Wheat Exports Australia, January 2011. CBOT December APW price, Fremantle 11
World Supply and Demand 300 250 Price (P) US$/t Production response P = -22070.1 + 33.33Q 200 1999 2009 150 100 50 Demand response P = 3909.91-5.649Q Quantity (Q) (mill. tonnes) 0 200 400 600 800 1000 Inelastic supply, inelastic demand gives highly variable prices. 12
Supply and Demand Responses Implications Rapid price changes Small supply changes give large relative price changes Demand shifters as important as supply shifters Domestic use shifts Weather induced supply responses Long-term and short term shifters Different shifters in different countries 700,000 650,000 600,000 550,000 World Production and Consumption 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 Production (1000 Mt) Source: USDA, PSD Online, February 2011. Total Consumption (1000 Mt) Source: USDA, PSD Online 13
Long-Term Wheat Yields 2000 1800 Decennial Wheat Yields, Australia 1870-2008 (C.M. Donald) No till farming? Mean decennial yield (kg/ha/yr) 1600 1400 1200 1000 800 600 400 200 0 Nutrient exhaustion Superphosphate, fallowing, new varieties Semi-dwarf cultivars, selective herbicides Better rotations, legume nitrogen, mechanisation, N fertiliser? Drought Time (last year of decade) Source: Recent data are derived from ABARE (2009), Australian Commodity Statistics earlier data from Williams, D.B. ed (1990). 14
World Wheat Yields Yield (t/ha) 7.00 Wheat Yields for Selected Countries, 1960/61 to 2010/11 6.00 5.00 4.00 3.00 2.00 1.00 Australia Canada China EU 15 EU 27 India Russia 0.00 Source: USDA PSD Online, February 2011 15
Australian Wheat Production Australian Wheat Production and Area Planted, 1970 71 to 2009 10 30,000 25,000 20,000 Wheat production (kt) 15,000 10,000 5,000 Wheat area (000 ha) 3 Average Wheat Yields in New South Wales and Western Australia 1972 73 to 2009 10 0 2.5 Source: ABARE (2011), Australian Commodity Statistics, January 2011. 2 1.5 1 0.5 New South Wales Western Australia Source: ABARE (2011), Australian Commodity Statistics, January 2011. 16
Who Wants Our Wheat? Uses of Australian Wheat, Five Year Average 2005 06 to 2009 10 Wheat exports 54% Food 16% Closing stocks 26% Feed & seed 3% Source: ABARE (2010), Australian Commodity Statistics, January 2011. Crop year 1 October to 30 September. Flour exports 1% 17
Indonesia Malaysia Japan Rep. of Korea Egypt Sudan China Vietnam Yemen Thailand New Zealand India Kuwait Italy United Arab Major Importers of Australian Wheat, Average (2004 2009) Indonesia Malaysia Japan Rep. of Korea 0 500,000 1,000,000 1,500,000 2,000,000 Egypt2,500,000 Quantity (tonnes) High unit value markets: Italy durum wheat Sudan moderate volume, high value Japan quality and price Australian Wheat Importers Sudan China Vietnam Yemen Thailand New Zealand India Kuwait Italy United Arab Unit Import Values for Australian Wheat, Average (2004 2009) Source: UN ComTrade data, January 2011 50 100 150 200 250 300 350 400 Unit Value (US$/tonne) 18
Australian Exports '000 tonnes 400 350 300 250 200 150 100 50 0 Source: ABARE (2010) Australian Bulk Wheat Exports, July 08 to April 10 From May 2009: Containers exported to 42 countries Bulk exported to 34 countries Indonesia Japan Sudan Iraq Korea,Republicof Yemen VietNam Malaysia Egypt China '000 tonnes 80 70 60 50 40 30 20 10 0 Australian Bag and Container Wheat Exports, July 08 to April 10 VietNam ChineseTaipei Indonesia India Malaysia Myanmar Thailand China Source: ABARE (2010) 19
Australian Bulk Exports by Grade Australian Bulk Wheat Exports by Grade, Oct 2009 to Sep 2010 ASW 24% Durum 1% Feed 1% Milling 1% Noodle 3% AGP 2% AH 15% APH 13% Source:Wheat Exports Australia (2010), January 2011 APW 40% AGP = Australian General Purpose AH = Australian Hard Wheat APH = Australian Prime Hard Wheat APW = Australian Premium White ASW = Australian Standard White 20
Flour Use in Australia Flour Usage in Australia, 2008 Industrial 24% Exports 13% Bread bakers 37% Food manufacture 15% Source: Flour Millers' Council of Australia(2009) Note: Biscuits included in food manufacture. Packet & mixes 3% Pastrycooks 3% Pasta 5% 000 tonnes 2500 2000 1500 Flour Use in Australia 1984 to 2008 (kt) Exports (kt) Industrial Food manufacture Packet & mixes 1000 500 0 Pasta Biscuit Pastrycooks Bread bakers Source: Flour Millers' Council of Australia (2009). 21
Retail Value of Sales in Indonesia, Malaysia, Japan and Australia, 2005 to 2009 (average) 1% 40% 0% 7% 24% Indonesia 4% 24% Bread Cakes Pastries Biscuits Breakfast Cereals Noodles Pasta 5% 22% 22% 0% Malaysia 22% 13% 16% Bread Cakes Pastries Biscuits Breakfast Cereals Noodles Pasta Japan Australia 1% 30% 11% 2% 10% 17% 29% Bread Cakes Pastries Biscuits Breakfast Cereals Noodles Pasta 16% 3% 5% 13% 13% 11% 39% Bread Cakes Pastries Biscuits Breakfast Cereals Noodles Source: Data from Euromonitor 22
The Future Specialty product Power axis (Seller) Augmented product Value axis Relative price Volume axis Core no frills Service Innovation Market focus Power axis (Buyer) Commodity magnet Cost to serve the market Source: Wilson, W.W. (1995), Decentralization of grain trading: Trends, implications and challenges, Australian Agricultural Economics Society, Perth, February 1995. 23
Market Types Market types Specialty high price, low cost to serve Commodity low price, high cost to serve Give away services to maintain market share Market Dynamics Commodity magnet pull Market focus move toward the value axis Seller power through differentiation Segment customers willing to pay for product characteristics Service innovation strategy Products and services unbundled reduce customer costs 24
Internationalisation of Wheat 1990 2000 2010 Grain Elevators Board Victoria Vicgrain 1995 Grain Handling Authority NSW NSW Barley Board NSW Oats Marketing Board NSW Sorghum Board NSW Oilseeds Board Central Queensland Sorghum Board State Wheat Board (Queensland) Queensland Barley Board Bulk Grains Queensland South Australian Co operative Bulk Handling Australian Barley Board Grain Pool Pty Ltd Co operative Bulk Handling (Western Australia) Landmark Australian Wheat Board GrainCorp 1992 NSW Grains Board 1991 Grainco 1992 GrainCorp 1999 Grainco 2000 Australian Bulk Alliance 1999 AusBulk 2000 ABB Grain 1999 AWB Ltd 1999 Fringe of other traders, assemblers and packers GrainCorp 2003 ABB 2004 CBH 2002 AWB Ltd 2003 Viterra 2009 Agrium 2010 Cargill 2010 Source: Based on Productivity Commission (2010), Figure 2.1. Bulk handler Marketer Dual function International 25
Internationalisation of Wheat From export monopoly to oligopoly (few firms) Economies of scale and scope International scale firms Extraction of oligopoly rents (market power) Role of the competitive fringe Frequent entry and exit Innovative and product differentiate Keep pressure on oligopoly rents 26
Summary World wheat industry is large, complex and risky Black Sea Ports are serious competition Supply and demand are inelastic price spikes Indonesia our largest market Baking sector is the largest end-use sector Quality versus yield consistency required Production differentiation helps both customers and producers 27
Implications/Actions Observation Wheat markets are complex and risky Competition for market shares is intense Stocks to use ratio is the industry thermometer Wheat is in the commodity magnet Actions Risk management strategies storage, income diversification, financial reserves. Innovative ways of reducing costs and increase yields. Seek to product differentiate. Monitor the direction of change in the stocks to use ratio. Reflects price signals Product differentiate. Target market services to customer needs. Different countries have different product consumption patterns requiring different qualities Different end-products require different wheat qualities Understand the quality requirements for different markets. Know and measure your grain quality. Blend to best advantage possible. Price discriminate for revenue improvement. Know and measure your grain quality. Plan for the long term manage the short term. 28
Thank You Work on What the World Wants from Australian Wheat is a jointly funded project of the Grain Growers Association and the Department of Agriculture, Fisheries and Forestry. More information can be found at http://www.graingrowers.com.au/ by downloading What the World Wants from Australian Wheat: Update 2010. 29
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