A battle ahead for barley

The past few years have seen unprecedented changes to the fabric of geopolitics. Chief among these have been the Brexit battles, the war of words between the United States and China, and now COVID-19.

One of the first casualties of the machinations of global superpowers was Australian barley. In May 2020, China applied a tariff to Australian barley of 80.5 per cent.

What really happened to barley? Were we punished? And where will our barley go?

The story of the battle for barley starts before the recent droughts. In 2016, the weather gods were amenable, resulting in a record barley crop of 13.5 million metric tons. To put this in perspective, during the previous 10 years, Australia had averaged 7.7mmt.

As anyone with even a rudimentary grasp of economics will understand, if you have an abundant supply of a commodity, and relatively stable demand, then you end up with lower prices.

As the country exported its huge surplus, large volumes of barley were shipped to China at prices that were at decade lows.

In this case, usually, the customer is happy as they receive cheap produce. Generally, the farmer isn’t that happy with the price but has the volume to somewhat make up for the discount, so overall their revenue situation is still pretty healthy.

However, in late 2018, the Chinese government launched an investigation into allegations of anti-competitive dumping.

This shocked most producers, as all of them would have been more than willing to sell their barley at higher prices to China.

This investigation was due to be completed in late 2019. However, an extension was granted until May 2020. As expected, China enforced a hefty tariff of 73.6 per cent as an anti-dumping duty and 6.9 per cent as a countervailing duty.

Many commentators from outside of agriculture assumed the introduction of a tariff was in retaliation for Australian comments regarding investigations into COVID-19.

A likely more significant cause was the trade deal between the US and China.

In early 2020, China signed the phase-one trade deal with the US to purchase a target of $US40 billion ($56 billion) in agricultural produce during 2020, to bring a stalemate to the festering trade scuffle between the two giants.

This target was an astronomical task considering that US exports to China only reached $US23.8 billion in 2017.

If China was to achieve the objectives set, then US produce would have to be prioritised. It is far more likely China enacted duties to ensure that American agricultural products such as corn and soybeans were imported.

The combined duties of 80.5 per cent have made Australian barley uncompetitive into China. As Australia recovers from drought and, all going well, a sizeable exportable surplus is likely to be available.

What are we going to do with it all?

During the past decade, the world has exported around 24mmt of barley, 21 per cent of which has originated in Australia.

China has been a home for 6.5mmt during the past five years, a substantial destination, which is now effectively closed unless heavily discounted.

The world’s top 10 importers constitute close to 90 per cent of the overall customer base for barley.

The largest buyer is Saudi Arabia at 8.2mmt. As a dry nation, this barley is used to feed sheep rather than produce beer or spirits.

Historically, Saudi Arabia had been the largest customer for Australian barley. However, it was more recently usurped by China.

Saudi Arabia has not been waiting patiently for Australia to return as a significant supplier. To meet its demand, the country has been purchasing from former Soviet bloc nations, along with Europe.

When we remove Saudi Arabia and China, the rest of the importing nations for Australian barley drop in importance quite rapidly.

Australian barley will need to be competitive to get a foothold back into Saudi Arabia, a task made more difficult by an appreciating Australian dollar.

To make matters worse, there are potentially two new entrants to the barley export market. The first being the United Kingdom, with an exportable surplus of more than 1mmt. The UK faces potential tariffs of €93/ mt for exports to the EU in 2021 as Brexit is finalised.

The country will then be forced to sell to countries outside of Europe. The obvious choice for their shipments is the north African nations, and the Middle East.

The next new entrant, and perhaps more surprisingly, is Iraq.

In recent years, Iraq has built up enough stockpiles of barley to start exports, with the government announcing that more than 800,000 metric tons of barley is to be marketed in the coming year.

Australia will be able to find a home for its barley.

However, it will have to price it competitively to win sales in a well-supported market with new competitors emerging.

• Andrew Whitelaw is a manager of commodity market insights at Thomas Elder Markets (TEM)