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China’s Swipe at Australian Barley Sparks Quest for New Markets

Ainslie Chandler
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China’s Swipe at Australian Barley Sparks Quest for New Markets

(Bloomberg) -- Australia’s farmers are on a mission to find fresh buyers for their barley, and are targeting bigger exports this year even after the country’s top customer, China, slapped tariffs of about 80% on the grain.

Markets in Japan, Vietnam, Indonesia, India and Saudi Arabia are among those being scoured for new clients or eyed for increased shipments of the cereal, which is mostly used in brewing and livestock feed.

“What we should take out of international trade and recent events here in Australia is that exporters, in simple business principles, should not have market concentration,” Agriculture Minister David Littleproud told the Rural Press Club of Victoria Thursday. “It’s important that we spread the risk.”

Australia is pursuing a domestic appeals process against China’s tariffs, Littleproud said, and will then consider whether to take the case to the World Trade Organization. “These WTO appeals take years,” he said. “That’s why we’ve been very keen to open up other markets.”

The tariff on barley -- along with a Chinese ban on some meat exports -- comes at a time when Australia’s primary producers are reeling from a steep drop in demand as restaurant shutdowns to stem the coronavirus slash global demand for products like beer, steak and seafood.

However, Australia is likely to see a bumper winter crop season following widespread early rains, potentially lowering prices. Rabobank expects barley exports to rise as much as 13% to 4.5 million tons in 2020-21.

The country is responsible for about 30-40% of the world’s trade in malting barley, used in brewing beer, whiskey and shochu, and 20% of feed barley trade, according to the Australian Export Grains Innovation Centre.

China has been by far the dominant buyer in recent years, taking 5.7 million tons in 2017-18, though that dipped to 2.5 million tons in 2018-19. That’s well ahead of the next buyer, Japan, which purchased 746,000 tons in 2018-19. About 3 million tons is used domestically.

Most new buyers will be seeking barley for feed, which doesn’t fetch the same premium as malting barley, said Nicholas Orssich at INTL FCStone. With prices for Australian grain coming down recently, it’s looking more appealing for buyers in Southeast Asia and Saudia Arabia, though the appreciating Australian dollar will be a headwind, he said.

Japan Potential

One buyer that could seek more of the grain for brewing is Japan. One of the several ships carrying barley that was diverted from China, the Eco Dynamic, was redirected to Japan. Much of Japan’s malting barley comes from Australia, said Orssich, so it’s likely to pick up some more, particularly now it’s more competitively priced compared with exporters like Ukraine and France.

Vietnam is another buyer that could increase purchases, both for brewing and for animal feed in its sprawling hog industry. It was the third-biggest buyer of Australian barley in 2018-19 with 393,000 tons shipped.

“Vietnam is one of the big growth stories,” said Victorian farmer Brett Hosking, chairman of industry group GrainGrowers, last month. “With Asia being such a close neighbor, I think there’ll be opportunities there.”

Australian exporter CBH Group has already pushed into the Vietnam market as part owner of the Interflour Group. On the feed side, CBH works with Japan, Saudi Arabia and Thailand, and is looking for opportunities in Indonesia, a CBH spokeswoman said by email.

Near Neighbors

Southeast Asia, while unable to absorb the quantity China imported in recent years, would provide an important alternative market, said Cheryl Kalisch Gordon, Rabobank’s senior grains and oilseeds analyst.

“Thailand is one of the fastest-growing destinations for Australian feed barley, and, with recent drought in the region, there’s been a much-reduced domestic production of rice, corn and cassava typically used to support feed rations,” she said. Barley imports surged to 386,000 tons last year, according to Australian government figures, making it the fourth-biggest market.

Feed barley could also be sold to Indonesia, Malaysia or the Philippines, Kalish Gordon said. “They currently import little to no feed barley however, so not only will the price need to be right to compete with corn, but also buyers will need to become accustomed to using barley in feed rations,” she said.

Hopes are high for increased trade with Indonesia when a free trade agreement comes into effect next month, eliminating or cutting tariffs on many livestock, meat, horticulture and grain imports. Southeast Asia’s largest economy is already a major market for Australian agriculture exports, including wheat, live animals and sugar, with shipments of A$2.8 billion in 2018.

There’s the opportunity for Australia to export half a million tons of barley straight into the Indonesian market, Hosking said.

Still, hurdles remain. “If the quality and price for Australian barley is competitive, we may be interested, as long as the timing is right, mainly later in the third quarter,” in the off-season for local corn, Desianto Budi Utomo, chairman of the Indonesian Feedmill Association, said by text message. But that will be subject to government approval. “Right now, I don’t think the government will allow any corn-replacement to enter this country,” he said.

India, Middle East

India is another market where Australia is seeking to strengthen trade ties. The market opened to Australian malting barley earlier this year after India lifted a previous barrier to entry, the requirement for a certain type of chemical to be used to fumigate stored grain.

For Saudi Arabia, the outlook may be less clear. Though Agriculture Minister Littleproud is hopeful exports to the world’s biggest barley buyer will increase, analysts say Australia’s shift away from the Middle East country in favor of China means rival suppliers including the EU and Russia now fill its place.

There’s also a move in the country toward compound animal feeds including pellets, instead of straight barley, which should “theoretically reduce the demand for barley in coming years,” said Andrew Whitelaw, senior market analyst at Mecardo. The Saudi appetite for Australian barley could soon be tested as it’s expected to come to the market shortly, said FCStone’s Orssich.

Aside from exports, there’s a strong chance some extra grain will make its way into Australian feedlots, as barley’s discount to wheat makes it appealing.

“On the east coast, we’ve got really low barley stocks, we’ve got quite a strong malting industry, quite a strong domestic feed industry with our dairy farmers, our feedlots,” Hosking said. “There’s a whole heap of opportunities on the east coast of Australia as well.”

(Updates to add comment from Orssich in third paragraph from the end)

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