Industry Briefing Paper

Transcription

1 Industry Briefing Paper GTA Trading Standards Test Weight and Milling Wheat Published by Grain Trade Australia PO Box R1829 Royal Exchange NSW 1225 Australia Phone: Website: Effective: 18 July 2013 Page 1 of 9

2 TABLE OF CONTENTS 1 GTA Grain Trading Standards Why does GTA develop Grain Trading Standards? How are GTA Trading Standards reviewed? Are GTA Trading Standards receival standards? What is the relationship between Trading Standards and Receival Standards? Wheat test weight & processing performance What is test weight? Test weight and end product performance/quality Wheat test weight & market conditions What are the minimum export requirements for test weight? What are the test weights of Australia s competitors? But our competitors (e.g. Canada & USA) determine test weight on a clean basis, not as is/farmer dressed as is the case in Australia Should growers clean their grain to raise test weight? Wheat Test Weight & promotion of Australian wheat Wheat Test Weight & trading risk Implications of the increase for wheat growers How much wheat will be affected? How will wheat that falls below 76 kg/hl be marketed? Management of test weight by wheat growers Will growers get a higher price? Will BHCs develop segregation plans for low test weight grain? Wheat test weight and wheat grades What grades will be affected? Conclusion... 9 Effective: 18 July 2013 Page 2 of 9

3 Test Weight and Milling Wheat In 2010, the Grain Trade Australia (GTA) Board approved a recommendation from the GTA Standards Committee to increase the test weight for milling grades of wheat from 74kg/hl to 76kg/hl for the season. This briefing paper provides information to assist the industry to understand the decision and its likely implications. 1 GTA Grain Trading Standards 1.1 Why does GTA develop Grain Trading Standards? The Australian grain trading industry, largely consisting of GTA members, needs contractual trading standards on which to trade grain. Those trading standards are generally included in contractual terms and conditions, that list grade and quality standards for each contract. These trading standards must reflect domestic and international industry conditions and benchmarks. In order to sell Australia s grain production, GTA establishes trading standards that reflect the minimum criteria that must be attained to ensure access to domestic and international markets. Our members include the majority of bulk storage providers and container exporters as well as commercial traders who sell into the domestic grain processing sectors. GTA is confident that our members are accurately reflecting the demands of their customers, who are the first stage processors of Australian grain. The Australian industry, including growers, fought hard to establish different specifications for wheat, to segregate and reward higher quality grain. Test weight is one of the few specifications that are standard across all milling wheat grades. 1.2 How are GTA Trading Standards reviewed? Up until 2008, industry used the AWB wheat standards as trading standards. In 2008 GTA developed wheat standards to ensure that standards would exist for wheat forward contracts then being written. The concern, which ultimately eventuated, was that AWB would cease publication of standards. Every year, the GTA Standards Committee calls for submissions from industry on potential amendments to the trading standards to ensure they remain contemporary. The GTA Board ultimately gazette the Trading Standards for the coming season based on recommendations from the Standards Committee. 1.3 Are GTA Trading Standards receival standards? No. GTA produces standards to reflect industry requirements via their contractual arrangements. The Standards are more accurately described as Trading Standards. Industry is free to use the GTA Trading Standards at any point in the supply chain. This is frequently done at receival (point of delivery of grain from growers) and when grain is traded / marketed between various parties along the supply chain. 1.4 What is the relationship between Trading Standards and Receival Standards? While GTA encourages industry to use the GTA Trading Standards they are not mandatory. Grain storage operators/bulk handling companies reserve the right to adopt receival standards they will apply to grain delivered by growers in any given season. However having a different BHC receival standard to GTA's recommended trading standard creates the risk that market signals from Australia's grain buying customers are not being transmitted to Australian grain growers; therefore historically bulk handling companies have adopted GTA's trading standards (or the Grain Industry Association of Western Australia standards in WA) as their receival standards for each season. The operation of the Australian market has changed from the 'Single Desk' era. Under a free market environment, there is no single exporter or trader who can absorb the risk of receiving grain that does not meet buyers requirements without reflecting that risk in lower prices to growers who cannot meet the market's requirements. Effective: 18 July 2013 Page 3 of 9

4 2 Wheat test weight & processing performance 2.1 What is test weight? Test weight is a critical contractual parameter, listed in virtually all domestic and export sales contracts. It measures the density of grain and is calculated as kilograms per hectolitre (kg/hl). It is also used by the storage and transport sectors to determine how much grain will be able to be stored and transported in a given volume of space. As grain growers know, test weight is one of five key physical measurements that regularly occur when grain is being graded at receival: the others are protein, moisture, screenings and falling number tests. As has been already demonstrated by the members of GTA who are the counter-parties that sell the vast majority of Australia's grain into international and local flour millers and grain processors, none of our regular grain buying customers acquires milling grain with a test weight below 76kg/hl, unless they are seeking to buy poorer quality such as feed wheat - a quality that very few Australian grain growers seek to produce in any given year. 2.2 Test weight and end product performance/quality The key characteristic that is indicated by low test weight is compromised dough and end product performance/quality. Low Test Weight indicates that the grain did not form properly or has not maintained its intended form. Potential causes may include: frost damage during protein deposition where the gluten-forming protein fractions were not laid down as normal within the endosperm resulting in tough and possibly unusable doughs and poor end products. lack of moisture during grain filling indicating not only high screenings (which is a direct loss) but also unusually dry and hard grain. Often this is not able to be conditioned correctly prior to milling and o more mechanical starch damage occurs which leads to slack doughs which make bakers irate and can cause loss of sales o higher ash levels result which reduce the value of the flour and require blending away as an extra process or require milling at lower extraction rates too much moisture after maturation leading to grain swelling and less density. Moistureswelled grain, even if not sprung provides higher enzyme levels which may make the grain unsuitable for many end products, or make doughs difficult to handle and compromise normal production processes. Any parcel of wheat grain that has a test weight of less than 78 has some basic defect. Submission to GTA Mark Laucke Managing Director Laucke Flour Mills Effective: 18 July 2013 Page 4 of 9

5 3 Wheat test weight & market conditions Industry Briefing Paper: Test Weight and Milling Wheat 3.1 What are the minimum export requirements for test weight? On the world market, feed wheat generally trades at 72 to 74 kg/hl, while milling grades have a minimum test weight of 76 kg/hl everywhere except Australia. A higher test weight for milling grades of wheat is being demanded by the domestic and export customers of Australian wheat, via the specifications listed in contracts. For instance, international customer contracts generally require 76kg/hl as a minimum test weight, as shown by the following aggregated data provided to GTA by grain exporters, although they do vary by grade and contract. Minimum test weight Markets Tonnage (5 year average) % of total contracts 76 Vietnam, China, Malaysia, Yemen, Sudan, UAE, 5,924,000 36% Bangladesh, other SE Asia, Oceania 77 Thailand, Egypt, NZ, Saudi, Taiwan, EU, other SE 2,429,000 15% Asia, other Africa 78 Indonesia, South Korea, Philippines, Japan, Iraq, 7,884,000 49% Iran, Kuwait, South Africa, other Total 16,237, % 3.2 What are the test weights of Australia s competitors? The test weight specifications of Australian wheat competitors are all higher than the current Standard, although they do vary by grade and contract. Supplier Country# Test Weight Minimum (kg/hl) United Kingdom 76 South Africa 76/77 France, Germany 77/78 Argentina, Brazil (Hard wheat) 78 Bulgaria, Kazakhstan, India (Hard wheat) Romania (Hard wheat), Russia, Ukraine (Group A, Grade No.1) United States of America HRW, SRW, SWW 76 HRS 75 Canada CWAD No.1 79 CWHWS No.1, CWRS No.1 75 CPSW No.1 (No.2) 77 (75) # Not all grades are listed for some countries 3.3 But our competitors (e.g. Canada & USA) determine test weight on a clean basis, not as is/farmer dressed as is the case in Australia. While our competitors do determine test weight differently, the market understands the parameters and tests listed in Australia s national standards and frequently specify in contracts the quality required based on each country s grades. To test on a clean basis will significantly change the sampling and testing process, add costs at receival and add to the time taken to assess deliveries at the sampling stand. 3.4 Should growers clean their grain to raise test weight? The cost may be prohibitive relative to the financial benefit. For the minimal amount of low test weight grain grown in Australia in any season, cleaning costs (including the opportunity cost of time consumed), will generally not justify undertaking the process. For the overwhelming majority of grain produced in Australia we easily meet every market's requirements: low moisture, low screenings, high falling number and sufficient test weight. As grain growers know, protein levels vary according to season, cropping input regime and soil type. Low test weight is not an issue for the vast majority of Australian grain growers. Effective: 18 July 2013 Page 5 of 9

6 4 Wheat Test Weight & promotion of Australian wheat The published minimum test weight limit is seen as an indicator to existing and potential customers of the standard of grain produced in that country. Australian wheat is poorly reflected to the market by having an official Standard of 74 kg/hl despite the current average test weight across all port zones for the last five years being kg/hl. 5 Wheat Test Weight & trading risk With a national trading standard of 74 kg/hl but with the need to meet export contractual obligations of 76 kg/hl or higher, export traders are exposed to a risk they are not readily able to manage. Therefore traders: decide the risk is too great and choose not to participate in a sale, particularly where it is a government tender; or factor the risk into the price offered to growers. The guarantee to the trade of 76kg/hl on outturn will give the trade more confidence to participate in markets where the high hectolitre weight requirements exist. Media release Sean Powell Chair Wheat Committee Grain Industry Association of Western Australia 6 Implications of the increase for wheat growers 6.1 How much wheat will be affected? Historically, grain with a low test weight is likely to have other defects which would cause it to fail specifications for higher grades, so failing test weight will not be solely responsible for downgrading. Based on data for the past five years supplied by bulk handling companies, the proposed increase will affect 2-3 per cent of receivals into the major storage system at harvest. 6.2 How will wheat that falls below 76 kg/hl be marketed? 1 In years when quality issues arise, competitive forces will ensure that 'fair value' for sub-standard grain will be found. If grain is delivered below, but not far below, 76kg/hl and there is no other sub-standard quality defect impacting the sample, it is likely that buyers will apply small discounts to acquire this grain. Many large bulk commercial storage providers currently offer dynamic binning services to grain growers to manage this risk. The recent examples below demonstrate how a grain market operating in a competitive environment will respond where grain just fails a specification. Data for these examples has been supplied by Profarmer Grain Australia. Example 1 - Melbourne Port Zone 2012/13 season The spread between Gairdner malt barley and Hindmarsh food barley Hindmarsh is considered by some maltsters to be an inferior variety despite meeting specifications for malt: however when stocks of preferred malt varieties such as Gairdner in the Melbourne PZ are in short supply, as was the case in the most recent season due to a very dry finish, the market adjusts bids to draw Hindmarsh values up to premium malt variety values. 1 Data supplied by Profarmer Grain Australia Effective: 18 July 2013 Page 6 of 9

7 On 17 th January 2013 the grower track bid for the Hindmarsh barley variety was trading at a $25/mt discount to Gairdner, however by 7 th February 2013, the spread was $0/mt, as the market adjusted to take into account the lack of Gairdner in the market. Example 2 - Brisbane Port Zone 2012/13 season: spread between SOR1 and SOR2 specification sorghum During the 2013 season, due to a wet summer, field fungi and sprouting was a common problem across the sorghum growing region. Segregations were created to cater for this lower grade material (SOR2), and a price spread was established by the market. On 18 th March 2013, the spread between SOR1 and SOR2 was $30/mt. By 26 th March this spread had narrowed to $16/mt. However, as the market identified that the scope of the problem was larger than anticipated, the spread progressively widened, so that by 1 st May, 2013, the spread had grown to $25/mt. Both of these are good examples of the market adjusting to value a sub-standard commodity based on its intrinsic value to the market. There have been numerous other examples that have occurred in earlier seasons and in each case, following an 'adjustment' period whilst the market assesses the volume of the problem, the market responds to identify the intrinsic value for the customer. Eventually, once the scale of the problem is identified, the market establishes fair value for substandard grades and the supply chain accommodates by segregating or 'dynamically binning' or blending to absorb these issues. GTA is confident that the actions of its members will ensure that significant 'cliff-face' pricing events will not occur where wheat just fails the specifications. An open, contestable market, combined with flexible storage operations that perform to meet market requirements, are the most important tools available to ensure that sub-standard grain can be absorbed by the market and still generate an acceptable return to the grain grower. 6.3 Management of test weight by wheat growers Minor wheat exporters set their benchmark at 72 to 74kg/hl, low quality, low price; not the target market for the high quality Australian wheat. Submission to GTA Thomas Breitenmoser Divisional Milling Excellence Manager Weston Milling Wheat growers may consider the following strategies to minimise the risk of wheat falling below the new GTA Trading Standards test weight minimum of 76 kg/hl. 1. Ensure you do not use wheat varieties that demonstrate susceptibility to low test weight in the likely expected range of seasonal outcomes in the relevant production region. 2. Ensure screenings levels are minimised to maximise the volume of heavier grain in the hectolitre tests at the point of grain sampling for each load presented for sale or delivery. 3. Consider on-farm or commercial storage blending programs that will address low test weight loads that might arise in the course of grain harvesting or marketing operations. 6.4 Will growers get a higher price? No. Historically higher test weight grain has been cross-subsidising lower test weight grain. However, it is very important to remember that this issue impacts a very small number of loads that are tested in any given season. There is a greater likelihood of premiums being achieved if grain growers can consistently produce higher test weight loads (e.g. premiums are established in some markets where a minimum of 80kg/hl can be guaranteed). GTA would encourage trading companies to pursue these opportunities so that greater value may be captured by Australian grain growers. Effective: 18 July 2013 Page 7 of 9

8 6.5 Will BHCs develop segregation plans for low test weight grain? Before opening a segregation to deal with 'off-grade' grain, BHCs will assess their capacity to 'dynamically' manage the issue by blending off-grade stock on receival. If the judgement of the BHC is that insufficient capacity exists to manage the off-grade deliveries into a standard grade segregation, the BHC will normally create a separate segregation for the 'off-grade'. Ideally storage providers would open these segregations if they expect at least 5,000 metric tonnes of receivals. This figure varies depending on the average variable cost of operation for the BHC, but is a general guide to the point at which it becomes economic to provide a special segregation. 7 Wheat test weight and wheat grades 7.1 What grades will be affected? The minimum test weight will increase to 76kg/hl in the season for the following wheat grades: APH1 APH2 H1 H2 APW1 APW2 ASW1 ASWS ANW1 ANW2 PNC PNE APWN DR1 DR2 SFE1 SFT1 SFE2 SFT2 7.2 Is ASW included? Yes ASW will increase to 76kg/hl in the 2013/14 season. ASW competes with grades of wheat which trade at discounted levels to established milling protein markets - relatively few 'regular' buyers in any given year seek to use ASW for commercial milling purposes. The majority of ASW is sold to highly price-elastic buyers or for food security programs; after this, ASW competes into stock feed markets. Any move that indicates a 'negative quality characteristic' relative to other Australian milling grades, such as a lower test weight for ASW, runs the risk of further widening the spread of ASW to APW values. However, in most seasons low test weight grain is commingled into stacks that should easily achieve the new minimum (76kg/hl). Domestic buyers of ASW, who are predominantly stockfeed manufacturers or feed grain processors, have argued against accepting a lower test weight minimum standard. Low test weight grain means low carbohydrate and hence energy yield per grain: not in any buyer s interest. Most bulk handlers are not willing to take the risk of receiving lower test weight grain yet having to guarantee an outturn of higher test weight grain. Bulk handlers would prefer that the 'receival' standard equals the out-turn standard to minimise their risk to managing their operations in an 'open access/commingled segregation' system. A higher test weight provides a greater level of confidence for Allied Mills and our customers that the milling wheat being milled will meet their increasing expectations of flour quality, end product performance and consistency. Submission to GTA Joshua Lawrence Allied Mills Effective: 18 July 2013 Page 8 of 9

9 8. Conclusion GTA produces grain Trading Standards to: o Reflect customer contractual requirements; and o Ensure Australian exports can compete with competitor grades and quality Domestic flour millers and consumptive feed users strongly support a higher test weight. Test weight and end product performance/quality are related. 100% of international contracts stipulate a higher minimum test weight. Internationally, 74 kg/hl is more aligned to feed grades than milling grades. The international competition for milling grades starts at 76 kg/hl. GTA moved the test weight to 76 kg/hl to better reflect customer requirements and, as an additional benefit, to demonstrate to world markets the higher quality attribute for test weight than is currently promoted by the Grain Trading Standards. Effective: 18 July 2013 Page 9 of 9