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CASTLE MALTING NEWS in partnership with www.e-malt.com
14 November, 2017



Barley news UK: Higher barley exportable surplus forecast for the UK this year

Last month the AHDB’s Early Balance Sheet was published, highlighting a bigger barley export pool than last year and a return to stronger production levels. The forecast higher exportable surplus of barley comes at an interesting time with Spanish production on the rocks following a poor harvest, as well potential concerns for some other key importers, AHDB reported on November 1.

The latest AHDB UK cereals supply and demand figures released last month, highlight a 1.8 mln tonnes surplus of barley available for free stock or export. While this is below the levels seen in 2015/16 (when UK barley exports reached almost 2 mln tonnes), it still represents a year on year increase and an opportunity for a stronger export campaign.

With the prospect for improved trade this season, the AHDB analysts looked at the opportunities for UK barley exports, including the potential tonnage that could be exported, as well as the likely competition. Finally, the analysts looked beyond this season to examine the effects increased export competition and poor gross margins could have on UK barley trade post-Brexit.

So far this season the UK has exported more than 250 thousand tonnes of barley. In order to scope out what the UK could potentially export for the remainder of this season the AHDB analysts have looked at three scenarios. It should be noted that the scenarios assume that the export pace is consistent throughout the season, although in reality this would not be the case. The scenarios are set out below:

Scenario 1 – This scenario assumes that UK exports continue at the five year average pace for the rest of the season. This scenario would see exports grow at approximately 103 thousand tonnes per month.

Scenario 2 – This scenario assumes that barley exports from the UK continue at the 10 year average pace of around 78 thousand tonnes per month, for the remainder of the marketing year.

Scenario 3 – This scenario applies the maximum export pace achieved in the past five years, excluding 2015/16, to the remainder of the season. 2015/16 is excluded as if barley exports in 2017/18 persisted at this pace for the remainder of the season, total exports would exceed the surplus available for free stock or export as highlighted in the AHDB Early Balance Sheet. For this scenario the pace, from 2014/15 has been considered the maximum achievable at 125 thousand tonnes per month. This scenario also reflects what would happen if the current pace were maintained.

In the current global barley supply and demand situation, scenario 2 seems unlikely, as this would see a significant slowing in the pace of barley exports from the UK and the addition of around 0.7 mln tonnes to opening stocks next season (assuming forecast demand levels do not alter significantly). It is more plausible that the eventual volume exported will be somewhere between scenarios 1 and 3.

In reality, the scenarios above represent quite a narrow range of possible outcomes and the dynamics of the year are still very much in flux. As such UK export volumes for the year are far from concrete.

UK barley exports have already begun to capitalise on the opportunities available around the globe, most notably in Spain, where production is more than 2 mln tonnes below the five year average. Increased Spanish import demand is a result of drought in the region during key growing periods.

In 2015/16, Spanish production was down more than 1 mln tonnes on the five year average. Subsequently, the propensity for Spain to import barley increased, with the nation importing 1.2 mln tonnes. In 2015/16, UK exports accounted for 38% of Spain’s barley imports (450 thousand tonnes) and over the past five years the UK has accounted for 29% of the nation’s import demand on average.

The Spanish import requirement this year is estimated by Strategié Grains at 1.1 mln tonnes. Assuming UK exports account for 29% (based on the previous five year average) of total Spanish wheat imports in 2017/18, we would see around 320 thousand tonnes of UK barley destined for Spain this season.

Outside of the EU, Algeria could see an increased demand for imports this season as barley production in the country is down 27% on the five year average, at almost 1 mln tonnes. Algeria is a harder market for the UK and indeed the EU to crack given the dominance of Black Sea grain going into the region. However, with UK feed barley (FOB) currently pricing below Black Sea barley, a potential window of opportunity could open up in the short term.

Further opportunity could also come from Saudi Arabia, despite the USDA forecasting lower of barley import demand for the nation this season (9 mln tonnes compared with 10.5 mln tonnes in 2016/17). While the UK doesn’t typically supply barley in any great quantity to Saudi Arabia, production challenges in Australia and Argentina could theoretically see the UK in a position to compete. The main factor working against the UK is the ability to consistently mobilise large volumes of grain in order to meet the requirements of the Saudi Grains Organisation’s (SAGO) tenders (individual shipments of 60 thousand tonnes ± 10%).

There are a number of key competitors in the global barley market. The ability of any country to compete for export demand is dictated by a number of factors driving the imported price of barley. These include supply and demand dynamics, exchange rate movements and shipping rates.

The key barley competitors in recent years, as well as the dynamics for these nations this year, is set out below.

Production for EU nations has been varied this season. Aside from the UK, France and Germany are the key barley exporting nations in the EU. In France, production is up 8% on the average, at more than 12 mln tonnes. After challenging conditions last season, as well as in 2013, this season’s output represents a “return to form” rather than a significant increase. German production this season is up only 0.2% on the five-year average, at just under 11 mln tonnes. Production increases for both nations could see them provide strong competition against UK barley for export markets. This is especially true given that these countries currently trade through the same agreements.

Production in Russia and Ukraine has historically been quite volatile, impacted by yield variability. While production is still far from consistent in both nations, there has been improved consistency in yield levels, which have exhibited a general upward trend in both regions over the past five seasons. Moreover, USDA estimates suggest that this season, the Russian barley harvest could be the largest in the past 20 years, making Russia another strong competitor this season and beyond.

Australian and Argentinian production levels are still not determined, with both nations still to harvest their crops. However, dryness in Australia and excess rainfall in Argentina could threaten production levels for both nations. The USDA currently forecasts production in Australia down 16% on the five-year average, and Argentina down 34% on the five-year average. As key exporters, further production falls will likely add inflationary pressure to markets.

Price will play a key role in the UK’s competitiveness over the course of this season. The increased availability of the UK crop for the global market relative to last year, combined with the present weakness in sterling, has likely helped make UK barley amongst the cheapest for export in relative terms. At the beginning of October, spot UK barley (FOB East Coast) was pricing almost $12/t under French barley (FOB Rouen) and almost $15/t under Russian (FOB Novorossiysk).

This certainly indicates that the UK is competitive at least in the short term. One caveat to this, however, is that both Russia and France are arguably in a better position to mobilise high volumes of barley for shipment. With the UK less able to do so, accessing tenders like those issued by SAGO remains a challenge.

In AHDB’s article looking at gross margins for the 2018 crop, released earlier this year, the picture for barley in UK crop rotations was uncertain. Both winter and spring feed barley exhibited fairly poor margins, as well as a poor return on variable costs. Purely on profitability grounds, this could suggest an incentive for farmers to move away from feed barley in arable rotations. This would see the ability of the UK to be a consistently strong exporter of barley reduced. It should be noted that whether or not the agronomic benefits of the crop in disease management outweigh profitability concerns remains to be seen.

Furthermore, the tariff analysis released last month highlighted the implications that a “cliff-edge” Brexit could have on the viability of UK barley exports, with a €16/t tariff further reducing margins and subsequently the incentive to grow barley in the UK.

Looking at the wider picture, the UK could face increased competition for trade from Argentina where production levels have grown by 72% over the past ten years. Furthermore, production growth in Russia could further increase the nation’s dominance in global grain markets.

This multitude of factors points to a challenging outlook for UK barley exports – which could be exacerbated if the UK faces a cliff-edge Brexit.





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