Desperately seeking Saudi…
Global barley values have been in decline for much of this year as the lack of demand from key importers continues to weigh heavily on international markets. This is despite the latest World Agricultural Supply and Demand Estimates (WASDE) having demand outstripping supply in the 2018/19 marketing year (July 2018 to June 2019).
Droughts in Australia and parts of the European Union in 2018 underpinned global values early last year. World supplies were forecast to drop to a 35 year low. However, it appears that the higher prices last year led to a decrease in demand as consumers turned to cheaper alternatives such as corn.
The downturn in demand is being reflected by the absence of both Saudi Arabia and China in recent months. The Saudi Arabian Grain Organisation (SAGO) has purchased 5.4 million metric tonnes (MMT) since the marketing year began. This is approximately 17 per cent higher than at the same time last year.
But SAGO has not issued a barley import tender since early November 2018, when it booked just over 1MMT for January and February delivery. Most of the barley imported into Saudi Arabia goes to domestic farmers to feed their sheep, goats and camels. Pasture has reportedly been abundant over the winter as a result of above average rainfall, and this is forecast to continue for at least another two months.
The washup here is that Saudi Arabian demand could fall by up to 800,000 metric tonnes (MT) to around 7.7MMT in the current marketing year. This would lead to a reduction in SAGO imports, possibly to as low as 7.5MMT. This is a decrease of 500,000MT compared to the 2017/18 trade year.
This is also a full 1MMT lower than the latest official USDA forecast of 8.5MMT, released in the WASDE report earlier this month. If Saudi Arabian imports do end up at 7.5MMT this season, this will naturally decrease world demand, add to global ending stocks and take a little bit of pressure off the very tight barley stocks to use ratio of 12.6 per cent.
According to trade sources, barley prices in the EU have fallen by more than US$20 in the last five weeks. Long holders, particularly of French barley, have reportedly folded to market pressure and liquidated their positions in the last few weeks, pushing prices dramatically lower. French feed barley closed last week offered at US$203 free on board (FOB). German and Baltic offers are holding up a little better, closing last week at a US$10 premium to French values.
Black Sea exporters appear to be out of the old crop game at the moment, being quoted at US$230FOB. But the new crop is a different story. Conditions across Europe and the Black Sea region have been quite favourable for the maturing barley crop. As a result, new crop Black Sea values are sub-US$ 200FOB and exports will be available in July. As the availability of new crop stock gets closer, this inverse will have serious implications for old crop demand and global values.
The other major barley supply and demand change in the February WASDE report was a decrease in Chinese demand of 1MMT. This was the major contributor to the forecast increase in global ending stocks of almost 500,000MT. Small increases were also made to Argentinian and Saudi Arabian ending stocks and the EU number was decreased slightly.
Australia is traditionally the leading supplier of feed and malting barley into China. However, the current anti-dumping investigation by China has had a dramatic impact on forward demand, and the Australian barley market is starting to feel the pinch.
Exporters have been frantically executing most of the China business that was on their books when the anti-dumping action was announced back in late November, and a significant proportion of barley currently on the export stem for the last half of February and for March is believed to be destined for China. It is demand beyond that point that is the issue.
Both the trade and the government have submitted the required paperwork and delegations have met with Chinese officials in recent weeks. It is basically a waiting game at the moment, with an interim measure announcement expected from the Chinese in the next few weeks.
Domestic corn is currently filling much of the demand void in China but there is an expectation within the trade that they will need to buy some Australian barley before the new crop Black Sea is available. Only time will tell.
Australian barley production from the last harvest ended up at around 8.5MMT. This was much bigger than expected leading into harvest, with Western Australian production surpassing 5MMT for the first time ever. While not a record year, the South Australian barley harvest also pleased to the upside compared to preharvest expectations.
Both the South Australian and Western Australian grower has sold around 90 per cent of their barley production and, as a consequence, the long now sits with the domestic trade. With China out of the market and uncertainty around Saudi Arabian intentions, exporters are anxious to exit their positions ahead of the new crop inverse.
This has placed significant downward pressure on domestic prices and has flowed onto export values which have decreased to around US$220FOB Western Australian ports. At this level, Australia is well placed to pick up Saudi Arabian demand when they eventually tender.
This decrease is also being reflected on the east coast. Late last week feed barley was trading at around $380 delivered Darling Downs, a fall of about $20 this month. Wheat values delivered Darling Downs have also decreased over the same period but not to the same degree. As a result, feed barley is now trading at about a $55 discount to wheat.
The sorghum crop is getting smaller by the day and the market closed last week at $360 delivered Darling Downs. This is only $20 under feed barley. At these spreads, the feed barley inclusion rate in stockfeed rations will be maximised at the expense of wheat and sorghum. This, in turn, will mean increased domestic demand for Western Australian feed barley, but it will certainly not be enough to soak up the bigger than expected exportable surplus.
The global barley market is on the back foot due to the ongoing absence of Saudi Arabia. With China not buying, Saudi Arabia is the only other volume home for Australia’s exportable surplus. The sharp fall in global prices bought Tunisia to the table last week. If it doesn’t draw out a SAGO tender in the next few weeks, the Aussie trade will get increasingly anxious and will be forced to have a serious look at overall Saudi Arabian demand for the last quarter of the current marketing year.
Peter McMeekin is a consultant to Grain Brokers Australia. Call 1300 946 544 to discuss your grain marketing needs.