Thursday, March 22, 2012
I recently completed work on a project for the Western Barley Growers Association, aimed at determining the best market structure for barley. It was a big project; three of us worked on a lot of number crunching and a lot of consultations with the barley industry, interviewing over 80 people in more than 60 companies, representing five countries (Canada, USA, China, Japan, and Australia). We even sent one of our team to China to get a first hand view of what is happening in that important market. And it was worth it; the fundamental thing we found was that going forward, things look pretty good for barley.
The idea of the project emerged while the CWB single desk was still in place. With that structure, there were many problems; low profitability and lack of exports primary among them, and it was apparent that the single desk may be one of the problems. Even though the single desk will soon end, changing the marketing structure dramatically, the project was still relevant since the end of the single desk created a new market with many questions and issues that need to be addressed.
Australia is our biggest malt barley competitor in China. In recent years, anywhere from 40% to 80% of Chinese barley imports came from Australia. Meanwhile, Canadian market share has bounced around 20%. We had to find out what Australia is doing differently.
What we found was that the largest part of the Chinese malt barley market was more interested in low cost than high quality. Into this market the Aussies have been selling malt barley that doesn’t quite make the grade for the highest quality malt barley. Their “Fair Average Quality” (FAQ) barley allows specifications that the high quality buyers would not be interested in – higher protein, perhaps less plump, a little stained, and so forth. As one person put it, “The only thing that really matters is ‘can it germinate’?” While not good enough for the high profile international brands, it serves the purpose for the lower quality requirements for the Chinese domestic market – and at a lower price.
Although it’s not clear why the CWB has not penetrated this market, it appears that the CWB’s strategy was to remain in the high quality market. The problem with this focus on high quality malt barley is that if your barley doesn’t meet the high standards being called for and is rejected, it becomes feed barley. This means, rather than being one of the best returns on a per acre basis, it becomes one of the worst. Many farmers have said that the risk is just too high and therefore, they don’t grow barley anymore; the acreage declines we’ve been seeing certainly support this.
An open market with Canadian exporters (including the CWB) competing in the larger, lower quality market in China should help. Think about it; you grow Metcalfe under contract but when the samples go in, although your germination is great at 97%, your protein is a little high. Whereas it previously would be rejected out of hand, now you could see it still accepted as malt barley but with a discount. Instead of dropping all the way down to feed values, you get a price somewhere between the top malt price and feed.
In Japan, things are much the same, only different. Japan imports barley for feed as well as for food products like mugicha (barley tea). And, just like in China, Australia enjoys as much as 80% of the Japanese market, while Canada hovers around 20%. But it's not because Australia offers lower quality, it's because it provides higher quality than Canada.
A few years ago there was a group of Japanese buyers touring the prairies, checking the crop progress and meeting with farmers and grain handlers. While they were visiting a farm in central Alberta, one of the Japanese buyers looked in a five-gallon pail sitting just inside the shop door. Reaching in, he pulled out a handful of grain and asked the host farmer, "What is this?" The farmer took one look and said "that's feed barley". The Japanese visitor said "we buy Canadian barley every year and we never get anything that looks this good."
Comparing how Australia and Canada handle barley tells an interesting story. Most of Australia’s barley is grown in four separate states, each with their own export ports. Barley grown in Western Australia gets shipped out of one of its ports; barley grown in Southern Australia gets shipped out of its ports – and so on. If Western Australia has a good crop and the other states don't, that high quality barley can find its way to a high quality buyer without getting mixed with lower quality barley from other regions.
We do things differently in Canada. All barley grown in Western Canada and exported to Japan gets shipped via terminals in Vancouver, regardless of where it was grown. So if Central Alberta has a very good crop and Saskatchewan has a poor quality crop due to bad weather – but still good enough to grade a #1 CW, and if barley from both goes to the CWB, it all goes to Vancouver and if it all "grades" the same, it goes in the same bins. There's been no apparent incentive to identify and segregate really good barley from the not so good barley - even though there may be a "premium" market for it.
We also learned that the CWB barley pool has often been used by farmers to market their poorer quality feed barley that the local feeders won't take. It may still qualify as a #1 but lightweight. So unfortunately the CWB hasn't had consistent access to the best barley grown in Western Canada keeping it from competing head-to-head with the Aussies. Which explains the surprise by the Japanese buyer when he saw the good quality barley we can produce.
I'm told that the CWB did not go after the lower quality malt barley markets in China (at lower prices) because it was felt it would dilute the malt pool price. I've never been told why the CWB didn't find a way to go after the high quality feed barley market in Japan but I suspect it's because they would be challenged to find and segregate the high quality barley; it certainly would have to compete with the larger domestic feed market which would make it a real challenge to attract and segregate volumes of high quality feed barley.
The US has experienced a similar drop in barley acres as Western Canada, due to fusarium and more profitable crops like corn and soybeans emerging in the northern tier states. Now, most of the barley grown in the US is under contract to maltsters. Many in the industry suggest that in the near future we will see American maltsters contracting directly with farmers in Western Canada, now that they can, adding even another competitive factor in the emerging barley market.
Posted by John De Pape at 4:12 PM