Rabobank Wheat map
Image Source: Rabobank
SYDNEY, AUSTRALIA — Robust demand growth in both food and feed sectors across the region has put the Southeast Asian market at the top of the agenda for many global grain companies, according to Rabobank’s latest report “The Wheat is On; Southeast Asia’s Wheat Demand is on the Rise.” 

Australia’s largest wheat export market, Southeast Asia, is tipped to continue to increase wheat consumption. However, this additional demand will increasingly be met by the Black Sea region, according to the report.

The report said the volume of Australia’s wheat exports to Southeast Asia will increase over the next five years, but its market share will shrink as Southeast Asia turns to alternate markets to fulfil growing demand.

“Currently, Australia accounts for around 49% of Southeast Asia’s wheat imports, but this is expected to fall to 37% by 2020 (which still represents around 7.5 million tonnes),” said Graydon Chong, Rabobank senior grains and oilseeds analyst. “Conversely, market share out of the Black Sea region is expected to grow from around 8% over the same five-year period (or around 3 million tonnes).”

The report said while it “expects to see a shift toward wheat originating in the Black Sea Region” being imported by Southeast Asia, it will be primarily directed to the feed sector, with Australia forecast to remain the key wheat supplier for food – particularly into Indonesia, Vietnam and Malaysia.

“That said, price, quality and logistics will play an increasingly important role in determining the share of imports each country has into Southeast Asia, which highlights the need for Australian product to remain internationally competitive, and vigilant in terms of marketing initiatives,” Chong said.

According to the report, rising incomes and westernization of diets is expected to drive up Southeast Asia’s wheat demand by an average annual growth rate of 4.5% over the next five years.

“This is down from average growth rates of 6.2% over the past decade,” Chong said, “but still reflects increasing demand from both the food and feed sectors.”

Chong said with most of the consumption growth set to come from convenient wheat-based products (such as instant noodles and bakery products), there is significant potential for further per capita consumption growth.

“Wheat consumption in Southeast Asia is well down on the global per capita average of 78 kilograms per year, and even around three times lower than consumption rates in China and India,” he said. “And with annual per capita consumption at only 29 kilograms in Indonesia, the largest wheat consumer in terms of volume, it highlights the potential for demand.”

Across the region, Thailand is expected to exhibit the strongest growth for wheat-based food products (at 5%, per annum), with solid growth rates also foreseen for Indonesia and Vietnam – in the vicinity of 4%, while growth rates are forecast to sit around 2% in the Philippines and Malaysia.

While strong demand fundamentals exist throughout Southeast Asia, Chong warns the market is likely to remain price-sensitive.

“From 2011 to 2013 (when wheat prices spiked), we saw a decline in its wheat consumption, largely dragged down by the feed sector, but food demand also fell below the 10-year growth rate,” he said.

The Rabobank report said while Australia has a competitive freight advantage into Southeast Asia, it has been eroded by the fall in global oil prices and bulk shipping rates.

“Over the past five years, we have seen these competitive pressures contribute to a reduction in Australia’s freight advantage against the Black Sea region by up to 50%,” Chong said.

“Furthermore, competitiveness out of the Black Sea region has been aided by currency weakness, with the Russian ruble falling by more than 50% against the U.S. dollar since the beginning of 2014, and there being a 60% drop in the Ukrainian hryvnia over this time period.”

Chong estimates the current price differential between Australian wheat landed into Southeast Asia and that from the Black Sea region to be around $15 per tonne.

“Not only is the Black Sea region a low-cost producer, but the quality of its product is improving,” he said. “While this will put some pressure on Australia’s competitiveness, the strong demand growth for wheat across the Southeast Asian region is expected to underpin the volumes of wheat supplied into the region by Australia.”

The report also highlights the need for companies to navigate the complex supply chain (which remains challenging with its lack of deep water ports, inefficient road logistics and lack of road and rail infrastructure) as well as, regulatory diversity across the region, if they are to meet the growing demand for wheat.