The War in Ukraine's Impact on Malting Barley Availability: Maltsters Need To Be Prepared to Step Up
The Russian invasion of Ukraine may persist for a while, bringing greater uncertainty to global grain markets. Russia and Ukraine are among the largest producers and exporters of barley and fertilizers. Together they are responsible for about 18% of global barley production, and supply about 30% of global barley exports. The war has already negatively impacted trade flows and thereby also the available global barley supplies. Competition from other crops with higher gross margins could potentially further decrease barley production, particularly malting barley. This is in addition to higher energy costs and logistical issues, as highlighted in our report on Beer and the Russia-Ukraine conflict.
War Adds More Disruption to Barley Trade Flow
Russia and Ukraine are the among the largest global producers and exporters of barley, primarily feed barley, not malting barley. Combined, Russia and Ukraine account for approximately 18% of global barley production and 30% of global exports. Prior to the war, barley trade flows were already disrupted. In May 2020, China imposed restrictive quotas on Australian barley and increased its reliance on Canadian, French, Argentine and Ukrainian barley. Ukraine captured the largest share of the Chinese business. China has become the largest destination for Ukrainian barley, accounting for nearly 70% of Ukraine’s exports. In 2020/21, Chinese barley imports from Ukraine reached 2.9m metric tons (mmt), a 2.0 mmt increase over the previous year. Normally, the majority of Ukraine and Russia’s barley exports are feed barley and their main destinations are Saudi Arabia, other Middle Eastern countries, and Northern African countries(.See Figures 1 and 2).
Now, with exports being disrupted by the war, these importers will be looking to replace approximately 2.0 mmt of feed barley that are left to export out of the Black Sea Region for the remainder of the 2021/22 crop year, which ends on June 30. China will more than likely quietly return to buying Australian barley. Likewise, the next largest buyer, Saudi Arabia, will be competing for European, Australian, Canadian and Argentine barley, as will all the other buyers. However, importers may have to contend with export restrictions, which both Ukraine and Russia have recently put in place. In other words, the same number of buyers are competing for a smaller supply, resulting in significant upside price risk.
Farmers Have Incentive to Move Away From Malting Barley
Along with the shrinking supply of exportable feed barley, the economics are in place for barley production to decrease, particularly malting barley. As has been well-documented since the beginning of the war, grains prices have rallied. In Europe, prices of wheat, corn and feed barley have increased similarly, by about 30% since the start of the war. As noted above, the war has more directly impacted feed barley than malting barley. Consequently, malting barley prices have only increased by ~9%. This has been reflected in the malting premium (spread between malting and feed barley). Malting barley usually comes at a premium to feed barley because malting houses demand a high-quality barley, which requires intensive and costly production management. In France, the malting premium has even turned negative for a few days and is around USD 14/mt, as of mid-March 2022. In both Argentina and Australia, the malting premium stands at around USD 30/mt, and in Canada at USD 50/mt. Feed barley prices have increased across key origins, especially France and Argentina (see Figures 3 and 4).
In addition, fertilizers prices, which were already high since last year, have increased further, by as much as 30% in key growing regions, since the war started.
Because of the change in the barley market price structure, feed barley and wheat command higher gross margins than malting barley (see Figures 5 and 6). The gross margins clearly show an incentive for farmers to move away from malting barley to either feed barley or wheat in the next growing season. The feed barley and wheat gross margins reflect the current high fertilizer costs. Even then, malting barley, which uses less fertilizer, is at a competitive disadvantage to feed barley and wheat. Maltsters should be prepared to provide an incentive to farmers to produce malting barley. Those incentives may be either higher prices or multi-year contracts or both. Otherwise, malting barley may be very difficult to procure until Ukraine and Russia come back on line. And no one knows when the war will end and exports will resume.
All the Factors Are in Place for a Malting Barley Shortage
There is an immediate concern about the supply of malting barley, as malting barley can be used for feed but not the other way around. If strong demand from the Middle East and China for feed barley continues to decrease the spread between malting and feed barley prices in key origins, it will become economical to buy malting barley for feed. Thereby, reducing available nearby malting barley supplies. The ongoing war is also likely to disrupt spring plantings in Russia, and especially Ukraine – that should normally be starting about now until end of May, to be harvested in the summer. So the feed barley shortage from the Black Sea Region, and its impact on malting availability, is expected to last longer.
There is also a longer-term supply concern for the time period Q4 2022 through 2023, given global production windows (see Figure 7). The spring barley crop in the northern hemisphere (EU, North America) represents only 30% of global production and will be planted in the April/May time period. No major changes are expected to spring barley plantings as crop budgets are set and inputs have been purchased. However, the remaining 70% of production, winter barley in the northern hemisphere and spring barley in the southern hemisphere, will be planted in the September-December time period. This crop will be fully exposed to higher input costs and the possible shortage of fertilizers. With lower fertilizer application, there is also the risk of reduced yields, and consequently, lower production for barley overall. And, as our calculated margins pointed out, feed barley and wheat will be favored over malting barley. Thereby, setting up the potential for even lower malting barley production and therefore supply into 2023.
In conclusion, the trade flow disruption and price spikes in feed barley caused by the war have the potential to significantly reduce the availability of malting barley to maltsters. At a minimum, maltsters will be facing higher prices until the southern hemisphere and northern hemisphere crop can be harvested at the end of the 2022 and mid-2023, respectively. Maltsters should find ways to incentivize farmers not to switch away from malting barley by providing better contracts with a premium price structure.