Summary
If Chinese Tariffs Are Removed
- China price access would add approx. AUD 70/mt to Australian export prices, with varying local/grower market participation
- Container opportunities will increase significantly
- FAQ malt markets will be back, actively seeking germinating feed barley which is a very good value add opportunity
- China’s recent strong barley demand and forward buying book will be supportive barley buying year round.
THE SITUATION
Throughout the China Australia trade war, we have been conservative with our prospects for barley with no information to consider and report to growers. Through this time, China has continued to purchase large amounts of barley at very high international values, remaining in the upper range of historical annual volumes throughout the tariff period.
The Australian Tariffs are essentially a full trade block, destroying the economics of barley imports from Australia and reducing imports to zero. The benefactors of this have been Ukraine, France, Canada and Argentina who have together replaced the tonnage which used to be sourced from Australia. In the last 3 years, we have seen significant issues with Canadian drought, French / EU drought and domestic price squeeze, current Argentinian drought and the obvious issues with Ukraine production and export execution which have led to an increase in the China barley premium over the (rest of world) base market.
At the same time, Australia has been selling the majority of feed barley exports to Saudi Arabia and other Middle Eastern countries and Japan, all at a significant discount to China values.
To give an idea of the price disparity between the world market and China:
Today Saudi bids are around USD 40/mt or AUD 58/mt below China bids at destination.
Some recent china barley sales are reported as sold “optional origin” including French and Australian origins allowed for execution. We believe 500 k – 1 mmt of is business open with these terms, which means that if the tariff is removed, these sales can switch to Australian origin and more than 10% of our annual barley export demand can be immediately switched to Australia without any new deals needing to be put on. The margins for China barley execution suggest that barley shipments will take priority over wheat if this occurs.
From an Ocean freight / trade flow perspective, Australia is the most efficient execution to China on feed barley, with an approx. USD 12-15/mt freight advantage to go to China vs Saudi or Middle East. This has further negatively affected Australian values by approximately another USD 15/mt, making a total price disparity between the China delivered (bulk vessel CFR/Cost & Freight) bid and Aussie fob markets of around AUD 70/mt. This is on top of any elevation margin barley has to Saudi prices…
It is true to say that China is paying more than they need to for barley due to the exclusion of Australian barley imports, along with other factors mentioned above.
THE IMPORTANT INFORMATION
Recently we have seen consistent indicators of improving Aust / China trade relations, below is an approx. timeframe over the last few months.
Dec 20th Penny Wong (foreign minister) visits China, the First Australian minister to do so in 3 years
Jan 5th News that Aussie miners were confident that an unofficial ban on Aust coal imports to China had been lifted, with recent cargo sold (first cargo is landed without issue)
Jan 25th (Wheat) and Barley approved exporter list was updated and re published by Chinese customs for the first time in more than 2 years
Jan 25th Changes were made by China customs to the phytosanitary requirements to import (Wheat) and Barley in the form of a requirement for a negative test result for Barley Stripe Mosaic Virus
Feb 6th Reported that the trade ministers from China and Australia had met virtually for 90 minutes with the aim to fully resume trade in a timely fashion. There are reports that the trade minister will personally visit China soon.
The meeting of trade ministers, with the aim of fully and promptly resuming trade is almost certainly pointed at barley and wine. Coal is moving, so we are not sure what else it could refer to…
Basis this info we further flag China barley access as a significant factor for barley strategy and marketing decisions.
THE RESULT
What happens if Barley tariffs are removed and Australian barley market access is restored?
Our view is that in the event of China tariff removal, Barley moves sharply higher locally by roughly AUD 30-50/mt, with a lack of sellers initially and a fresh higher price market available combined with the fact that barley is already very cheap domestically and this will force the consumers to market. With the size of the crop, we will see significant selling as price targets are hit over time which is likely to cap the local markets participation in full China prices and therefore expand elevation margins significantly in the process.
The opening of China also reduces Australian exposure to inverted Northern Hemisphere markets, where prices are lower in Jul/Aug as new crop Black Sea and Europe are harvested and available. Our freight advantage to China vs Black Sea and EU will see our markets hold up better than competing with new season stocks into Saudi markets, where those countries have a relative ocean freight advantage.
Chinese buyers are also more likely to buy out the calendar curve into Q3 and Q4, which allows Australia to build a better forward book vs the current situation in Saudi, where buying is largely hand to mouth. This will mean better forward opportunities and more consistent liquidity for Australian barley growers.
FAQ malt (germinating feed into malt) opportunities will return to the market, with a significant demand for low spec malt into China. This will mean a focus on segregation of desiccated product, but also offers a higher market again to world feed prices.
Container opportunities for both malt and feed will once again explode, with Chinese container rates some of the most competitive available ex Australia due to the high concentration of imported products (container exports are a function of returning empty containers to an exporting hub. Middle Eastern container rates are very high and limit container opportunities for barley considerably.
Today on straight calcs between the 2 major markets, China Barley would add around AUD 70/mt to the underlying value of Barley. If we consider that this will be very attractive for Australian traders and growers to sell to China, we may see some deterioration in the premium / outright markets and this premium may be eroded a little. Likewise, it is plausible that the EU and Canadian markets may get more aggressive too and erode the market further with some competition – But in the end, there is a big premium there and this will remain for the most part.
EXPORT EQUIV PRICE CALC AUD
| STATE | AUST | CHINA | SAUDI |
| WA FIS | $320 | $439 | $369 |
| SA PORT | $315 | $409 | $339 |
| VIC PORT | $315 | $373 | $304 |
EXPORT MARGIN VS GROWER BID
| STATE | CHINA | SAUDI |
| WA FIS | $119 | $49 |
| SA PORT | $94 | $24 |
| VIC PORT | $58 | -$11 |
Full China access would see global barley flows correct, and force the EU, Black Sea and Argentina back into Saudi and Middle East. Lower barley values in these countries would also see increased domestic utilisation (feed) and some likely acres loss over time. On the flip side, Australian prices will encourage acres and likely try and push for some more wheat feeding back into rations, propping up the bottom of the wheat market further.
Overall Barley demand will remain relatively steady on the whole, as will production +/- weather. This is a shuffle of what goes where.
Flexi Grain has the ability to add significant further value for the grower over local market participation via export margins and value add marketing such as FAQ (Fair Average Quality) malt shipments, in the event that the Chinese tariffs are removed. Give us a call to discuss.
