Industrial wheat consumers, especially local flour millers can already sight a wider profit margin from the growing decline in the prices of wheat, as they begin hunting record producing regions for the lowest prices.
Wheat prices have been sliding since the last seven months but took a poorer turn lately to shed more than 6.5 percent to $4.57 a bushel last week, just as surplus global supply weighed on prices. The glut comes with a stiff competition from the Black Sea region, placing pressure on the US export prospects.
Russia, the world’s top wheat exporter holds a surplus of 4 million to 5 million tonnes of old-crop grain for export. The market has been expecting the Black Sea region suppliers, mainly Russia and Ukraine, to run out of surpluses following an aggressive export drive in the second half of 2018, creating avenue for the United States to sell some of its large inventories.
“The slower pace in sales was the main reason for the weaker US prices although the excessive cold weather, with potential adverse impacts on growing conditions, limited the downward pressure,” according to the Food and Agricultural Organisation.
Industry observers see Russia extending export of the old-crop wheat beyond April to August. Russian wheat for delivery in March was $234 a tonne, free on board, during the week ended February 24.
In the near term, this competition may last enough to underpin prices, and will make cost sense to most local millers who rely majorly on imports for sourcing wheat. Wheat is a core raw material for most flour millers, an ingredient used in the processing of most confectionery meals including bread and pastries. But Nigeria’s wheat production remains poor and uneconomical for flour milling.
David Anazia, CFO at Dangote Pasta & Noodles Ltd. said the wheat market trend could at least inject N350 million in the profit margin of the company. Since the capacity of milling companies increased by 20 to 30 percent, millers have engaged in a game of size of market coverage instead of price, an tactic to stay competitive.
“They will rather look for shares than for profitability. So what will expand the margin is the reduction in the wheat price itself. So it is a weaker price for us is positive,” Anazia told BusinessDay.
“A dollar increase in the price of wheat will cause our production cost to go up by about N350 million, depending on your volume. For flour millers of Nigeria for instance, it might be triple. Last year we bought black sea between $268 to $272 per metric tonne. But this year, the last one we bought was N258. You can see the differential of about $10 to $20.”
Domestic consumption for 2018 was estimated at 4.86 trillion metric tonnes while the 2018/19 consumption has been projected to rise by 200,000 tonnes to 5.4 million tonnes. Nigeria’s production at less than 300,000 metric tonnes of 2018 on the one hand cannot absorb this demand. The current cost of locally produced wheat pegged at N130, 000 fails to be competitive with what is obtainable from imports.
Buying locally produced wheat has become a case of corporate social responsibility, an exercise to encourage farmers rather than a decision informed by market fundamentals.
Victor Oritedi, head of sales, Agro Allied Products at Flour mills said the firm would also save a significant amount from a cheaper global price trend to widen its profit margin. Flour Mills consumes about 2.5 million metric tonnes of wheat yearly and spends between N80, 000 to N90, 000 on a metric tonne.
“The price determines where we buy from and as it is, the trend means an opportunity to lower cost,” he said.
