Australia's WA wheat market explodes as protein levels disappoint

23 Nov 2021 | Masha Belikova

Prices in the Australian wheat market have surged this week as mounting fears over the protein content of the huge crop boiled over to drive the difference between Western Australia's APW and ASW domestic grades to $70/mt and around $30/mt in the export market, trade sources told Agricensus.

The moves come amid harvest delays across the country and mounting fears that heavy rain will deliver higher yields, but a lower protein level than had previously been expected.

The difference between ASW and APW grades started to widen back in September - although the move represented a return to typical trade patterns where the premium APW traded at a higher price than the standard ASW grade. 

Prior to September, both grades have traded at near parity for much of the last two years after dry conditions tightened the supply to the market and provided support to both premium and standard wheat grades. 

Since then, expectations have mounted that Australia will harvest a huge wheat crop - but steady rain through the closing stages of the process has raised fears that the bulk of the production will be standard, rather than higher protein grades.

APW has commanded a premium of around $7/mt for much of the period since September, but that premium surged significantly in recent days as the yields in WA, the country's main exporting region, appeared to be higher than expected boosting production outlooks.

Given the fears over protein content, that means participants now expect more lower protein wheat will be harvested, while rains in other regions mean there remain harvest delays.

Currently, trade sources have told Agricensus that it is very hard to find offers for APW in WA, but export price ideas stand at above $370/mt FOB, while ASW offers can be found at around $330-$340/mt range, depending on an 8% or 9% protein level.

“Milling wheat is much tougher to put a value on as prices are rising due to wet weather in NSW [New South Wales] and low protein in WA making the trade much shorter quality wheat than they thought they were,” a broker said.

Trade sources also said that an additional push is coming from traders who have sold APW volumes for November-December and later loading, but currently cannot find the volume of supply needed from the market.

This has resulted in a situation where major players in the Australian market are preparing for lower protein production by building discounts for lower protein levels in final delivered volumes into the contract.

One trade source indicated that a local player was offering a $30/mt discount in the event that the final protein content is 9% instead of the agreed 10.5%.

However, that discount is still likely to be cheaper compared to trying to originate higher protein grades in the market, as the difference between the two grades can stretch to up to $70/mt.

Earlier this week Australia-based brokering and advisory agency Ikon increased its estimate for feed wheat production in Australia to 6 million mt, versus an average production figure of 2 million mt, and a total production outlook of 31.5 million mt, according to the USDA.

That means the volume that is now deemed to be feed wheat has been carved out of the expected milling wheat volumes - with the higher protein grades already in short supply worldwide.

“The market is panicking but rightly so. Balance sheets globally were relying on a big Aussie milling wheat crop to cover until new crop northern hemisphere [arrived]. I guess the rally in Aussie prices is overdone but prices won’t go back down to where they were a month ago until maybe the end of Q1 and assuming Northern Hemisphere crops are all looking good,” the same trader said.

So far, Australia has already harvested 10.9 million mt of grains, according to the weekly updates set by the three biggest companies, CBH, GrainCorp, and Viterra, while the wheat harvest has only just started and so uncertainty about quality remains.