Australian wheat exporters have, on paper, still been losing money this harvest in spite of a welcomed reform to the allocation system for shipping slots implemented last year, according to spot transaction data collected by Platts.
So far during the 2015/2016 harvest, wheat export transactions in Western and Southern Australia have been on average $6-7/mt below domestic prices, based on data from Platts and Profarmer Australia.
This “export discount” was measured by comparing Platts’ daily APW wheat assessment, which tracks actual export transactions between trading firms and Asian flour millers, and Profarmer’s Kwinana FOB replacement value for APW1 from the start of November 2015 to date.
Too much shipping capacity
“Simply put, there is more shipping capacity than demand for shipping slots,” a Singapore trader explained.
Because shipping slot allocation are “take or pay” agreements where exporters must pay premiums of $5-9/mt if they fail to utilize their laycans, they would often rather discount the value of the wheat to secure export deals than simply pay the full premium and not move any volume.
In practice, this means that on any given day, the most competitive offers for seaborne wheat exports will tend to come from those most under pressure to fulfill shipping slots.
Currently, the system for allocating shipping slots forces exporters to predict wheat export volumes for the upcoming season a few months before having a good idea of the condition of the crop.
Besides the size and quality of the crop, other unknowns that can impact future export demand include a potential reluctance of farmers to sell their crop over a specific period, and the competitiveness of Australian domestic wheat prices compared to other major global supply origins.
Perhaps inevitably, this resulted in a mismatch between slots secured by traders and the actual ability to ship.
In 2015/2016, traders booked too many slots and ended up competing on the price of wheat to avoid paying the premium.
The oversupply of slots this year comes in spite of a reform of the shipping slot allocation system imposed last year after a review by the Australian Consumer Competition Commission.
Under the new long-term agreement (LTA) system introduced bulk handlers, trading firms in Q3 2015 committed to purchasing a fixed number of pre-determined export laycans for five years, up until 2020.
Western Australia’s largest bulk handler CBH reported selling “a minimum of 10 million mt/y” to grain marketers under these LTAs. Other marketers not taking up these LTAs were offered the opportunity to purchase additional slots on a first come first serve basis, 2.5 million mt of which were sold in August 2015.
Traders agree the system is a vast improvement on the previous mechanism, mainly because it provides them with visibility on the volumes they can expect to ship.
Another major benefit is the reduction of the premiums, which used to be around $30/mt. Such large penalties created significant distortions in FOB wheat transaction values, as traders long on shipping slots would offer cargoes substantially below market price to entice millers and utilize their pre-purchased allocations.
Since last year, however, the reduction in premiums has resulted in better price consistency between consequent export transactions, thus facilitating the emergence of representative spot price discovery.
Highlighting this price consistency, spot transactions reported to Platts between November 2015 and February 2016 were on average within just $1.07/mt from the Platts APW index on the day the deal was agreed. This shows that a consistent, repeatable price is now discoverable.
…but still unsustainable
But in the face of persistent losses, traders are still hoping for change. “It is not sustainable. Everywhere else, people insist on defending an elevation margin. Australia is so unique in how people are willing to lose money,” one Singapore trader commented.
“People are digging their own graves, and won’t be able to do this for long,” another trader added. And with Vitol trimming Asian trading and CHS also scaling back, perhaps they won’t have to.
Competition for market share is also fueling this trend, as trading firms jostling for position end up buying too many slots, even as the constant treat of having to pay the premium forces traders into riskier trading strategies.
Some large, well-capitalized trading firms are simply waiting for smaller competitors to give up, while others like Bunge have built their own export terminals as a solution.
In the meantime, most expect and hope for the continued liberalization of Australian grains exports, and a levelling of the playing field.
(Source – http://www.blackseagrain.net/novosti/australian-wheat-exports-still-challenging-despite-shipping-slot-reform)