LAST week we saw ABARES and USDA finally come to the party, realising what Nidera has been saying for many months now, that the Australian cereal crop is destined to break both the wheat and barley production records.
With big crops come many challenges. Having the infrastructure to store such a large crop. Finding the logistical capacity to coordinate a domestic consumer program, plus an extremely large export program. Booking capacity on the export stem to match export consumer interest. That is all before being price competitive in an oversupplied global market place, and the inevitable increase in carry outs, as the sheer size of the Australian crop means it will be impossible to ship the entire exportable surplus.
So where will the Australian feed barley exporter find demand? The values achieved in the recent Saudi Arabian tender were incredibly high compared to where many had expected it to trade. It not only took the industry by surprise, but suggested Australian feed barley is now competitive into that destination.
However, the fact that all the business is very nearby and Saudi Arabia had increased the risk of execution, by changing to arrival dates as opposed to load dates meant two things. Firstly, a premium was added to cover the additional risk, and secondly most of the positions transacted can’t be executed out of Australia, because of the lack of logistics capacity, as a result of the large export program that is already in place. Not to mention an export stem that is filling fast in all port zones.
China continues to have an insatiable appetite for feed grains. A recent clamp-down on overloaded trucks in China has created a logistical bottleneck and increased internal transport costs for the recently harvested corn crop. Most of the Chinese corn crop is grown in the north eastern provinces, but the main consumptive regions are in the south of the country. In an attempt to alleviate the situation, the government is mandating its state-owned rail company guarantee a minimum amount of rail capacity from north eastern China to various ports from where the corn can be barged south.
Nevertheless, this just improves the competitiveness of imported feed barley and it now works into the compound milling market in southern China at the expense of domestic corn. The Australian exporter will face the same logistics challenges, mentioned above, as well as more stringent phytosanitary requirements, particularly import protocols relating to pests and weed seeds. Of course there is also the increased political risk when dealing with China compared to most other barley markets.
From a grower perspective, the ability for the entire market to rally will be limited by the size of the crop still being harvested. The opportunities will be where premiums (they probably won’t be large) are paid in certain port zones by individual exporters, when capacity is made available or logistical squeezes necessitate.
The domestic market will also be worth watching. At the current discount, domestic feed barley is likely to buy business away from wheat destined to the feed market. Whilst not in full carry, the eastern Australian wheat futures contract on the ASX is paying some of the cost of carrying grain. Will this be reflected in domestic wheat prices pushing more demand to barley or will the pure size of the Australian wheat and barley crops make them compete for both domestic demand and export logistics?