Barley used to feed livestock including camels is subsidised in Saudi Arabia. Photo: AEGIC blog

THE feed barley tender announcement by the Saudi Arabian Grain Organisation (SAGO) late last week came hot on the heels of news that the kingdom is poised to abandon its state-issued grain tender program in favour of private sector importers.  The decision by the world’s biggest importer of barley is a significant step in the economic transformation program announced by the government in 2016.

Saudi Vision 2030 is a strategic framework implemented to reduce Saudi Arabia’s dependence on oil and to improve the nation’s food security. First announced by Crown Prince Mohammed bin Salman in 2016, the goal is to diversify the kingdom’s economy and develop public service sectors such as infrastructure, education, health, recreation, and tourism. Under the program, private enterprise will be encouraged to take a leading role in many of the initiatives.

Behind the scenes, independent of recent SAGO barley tenders, the privates have been active in engaging global barley exporters. There was a round of business done back in September, and commitments from Australia alone are rumoured to be already as high as 500,000 tonnes in the current marketing year.

Feed subsidies changing

The privatisation of barley imports was primarily facilitated by a change in the kingdom’s animal feed policy in January of this year. Historically the government directly subsidised all grain and feed imports except for hay, but now payments are made directly to livestock and poultry producers based on production. Small livestock farmers are the major consumer of imported feed barley, and they are now given cash payments based on the number of animals they are rearing. They must have a maximum of 300 animals in the four eligible livestock categories: goats, sheep, camels and cattle.

All farmers who qualify for the scheme receive monthly grants of US$2.13 per head for goats and sheep, $10.67 per head for camels, and $16 per head for cattle. The Saudi government has allocated a total budget of $320 million a year to the program.  The payment regime is a little more intricate for the poultry industry, where the government has allocated up to $187 million annually. The subsidies vary according to the type of production, and are intended to incentivise producers to improve biosecurity protocols and adopt technology that increases efficiency and productivity.

In the World Agricultural Supply and Demand Estimates (WASDE) report released last week, the USDA pegged Saudi Arabian feed barley imports at 7.3 million tonnes (Mt) for the 2020-21 marketing year. This figure was down 200,000t from the October forecast, but up slightly from 7.2Mt in the 12 months to June 2020. The major sellers into the kingdom in recent years have been the European Union and leading Black Sea producers, Russia and Ukraine.

Altered global balance sheet

The WASDE report called global barley production 156.4Mt for the 2020-21 marketing year. This is down around 400,000t from its October estimate, with small falls in Turkish and EU production the prime contributors to the downward revision. Total world trade was increased 500,000t, with China and Iran the big movers, up 1.2Mt to 6.5Mt and down 500,000t to 2.5Mt respectively.

The USDA held its Australian production estimate steady at 10.5Mt, which seems extremely conservative compared to domestic trade forecasts, some of which are in excess of 13Mt. That said, it always seems to take the USDA a couple of months to catch up on reality outside of the US.

Australian barley exports in 2020-21 were also steady corresponding month on month at 4.4Mt, up from 3.2Mt in 2019-20.  Again, that number is well below domestic trade estimates, many of which are above 5Mt and growing.

Just how big that number becomes will depend to a large extent on Australia’s competitiveness into the Middle East over the next six months. At current values, Australia is hugely competitive into the Saudi Arabian Red Sea ports of Jeddah and Yanbu, and is the cheapest major origin into the Arabian Gulf destinations such as Kuwait, Qatar, United Arab Emirates and the Saudi Arabian port of Dammam.

Australia bags tender

The SAGO tender announced late last week was for a total of 720,000t of animal feed barley in 12 shipments for arrival in January and February next year. Eight of those cargoes, or 480,000t, are to be discharged at Red Sea ports, and the balance are to be offloaded at Dammam.

And it wasn’t surprising to see a clean sweep to Australian exporters when the tender results were released on Monday. Glencore and GrainCorp shared the Red Sea port sales with four cargoes apiece, and the Arabian Gulf business went to Glencore and CBH, each selling two cargoes. While the offers are optional origin, most, if not all, are expected to be executed out of Australia.

In the end, SAGO purchased 730,000t at an average price of $234.83/t cost and freight. This is $8.49/t more than the mid-September tender for 540,000t for November-December delivery, and is $36.20/t above this season’s low. With freight at $20/t, that equates to around $215/t free on board Western Australian ports, which is bang on replacement value today.

With a big barley crop currently hitting the silos, Australia needed to see some strong demand outside of Asia.  Picking up such a large chunk of Saudi Arabian business is perfectly timed to counter the price pressure of a rampant harvest.