|Source: BMI, Date: May 3 2013|
|More Weakness To Come|
|Front-Month LIFFE Barley, EUR/tonne (weekly chart)|
We expect front-month barley prices to continue trading in the EUR210-250/tonne range over a three month horizon. The northern hemisphere's growing season is now under way and looks satisfactory, as plantings have been boosted by attractive returns relative to other crops. The rebound in supply in 2013/14 after 2012/13's dismal season should help to ease prices. Meanwhile, we expect wheat prices, the main alternative to barley, to remain elevated, which should prevent prices from reaching the lows of 2010. We see strong support at the EUR210/tonne level.
We expect barley prices to remain relatively resilient over the next two years, underpinned by persistent tightness of supply. Dry weather in various major producers in 2012/13 left the global market in deficit and dragged stocks lower for the fourth consecutive year. We maintain our forecast for prices to average lower at EUR230/tonne in 2013. Looking ahead to 2014, we expect prices to ease further and average EUR225/tonne as the global market shifts into a small surplus of 1.2mn tonnes on the back on a rebound in output in key producing countries. This represents a more bearish outlook than that implied by the current futures curve, with the January 2014 contract currently trading around EUR246/tonne.
We believe prices will continue in a downtrend to 2017, as supply improves slightly. We forecast the stocks-to-use ratio to bottom out in 2013 before slowly increasing over the following years. Moreover, our view for wheat prices to continue easing from 2015 will help to keep barley prices in check.
|Bottoming Out In 2013|
|Global - Barley Production Balance (Mn tonnes) & Stocks-To-Use Ratio (%)|
Production Rebound In 2013/14
Barley production looks poised to rebound in 2013/14, mainly because of low base effects after 2012/13's dismal crop. Elevated barley prices compared to other grains ahead of the Northern Hemisphere's plantings season will also boost barley output. We expect production to come in at 135mn tonnes, up 4.0% year-on-year (y-o-y). We forecast output to outstrip consumption for the first time in four years and see the surplus at 1.2mn tonnes. As a result, the stocks-to-use ratio will start to recover in 2013/14 after several years of decline and reach 14.9%, which is still below the 10-year average of 18.2%.
In the medium term, supply should slowly improve as consumption of barley remains subdued. We believe the stocks-to-use ratio will bottom out in 2013 and gradually increase in the following years, reaching 18.7% in 2016/17 (compared with 15.0% in 2011/12). However, subdued production growth will impede the global market from recording significant surpluses. Barley prices should therefore remain historically resilient.
|Country||2013/2014 ('000t)||Risks||2014/2015 ('000t)||Risks|
|Source: BMI, USDA.|
|EU -27||53,559||Downside - Weather||54,148||Low Prices|
|Russia||15,731||Downside - Weather||15,266||Low Prices|
|Ukraine||8,450||Downside - Weather||9,075||Low Prices|
|Australia||8,000||Downside - Weather||8,400||Low Prices|
We expect production to rebound in various major suppliers in 2013/14, after dry weather conditions hampered output in 2012/13. Barley/corn and barley/wheat price ratios turned in favour of barley ahead of planting, which encouraged farmers to plant more barley crop. Moreover, growing conditions for the August-October harvested crop are rather favourable. The Black Sea region, Australia and Turkey's output should recover, while production in Canada and China is likely to grow for a second consecutive year.
|Stable Long-Term Picture|
|Barley - Select Countries Imports, '000 tonnes|
Temporary Rebound In Consumption In 2014
We forecast barley consumption to rebound by 2.0% y-o-y to 134mn tonnes in 2014, partly due to the increase in available supply. More specifically, demand in Russia, the world largest consumer, and in Australia, is likely to recover rather strongly.
However, various key consumer countries will maintain subdued if not negative consumption growth, as livestock producers are slowly replacing barley with corn and soybean as the main feed grain. In 2014, we expect consumption to be 8.0% lower than the 2005 level, compared with significant increases of 12.2% and 28.4% for wheat and corn respectively over the same period. Among the largest 10 producers, only Australia is forecast to see significantly stronger demand by the end of 2014 than in 1999. This trend is likely to continue in the medium term and we see barley consumption growth decreasing by 0.2% annually between 2013 and 2017.
|Heading Down From Now|
|Price Ratio - Barley / Wheat (LHS) & Barley / Corn|
Risks To Price Outlook
The risks to our price outlook are mainly weighted to the upside. Should other grain prices continue to trend higher due to deteriorating supply prospects, barley prices would also rise on the back of consumption substitution effects. Should corn and soy harvest projections be revised down, higher demand for feed barley could put upward pressure on prices. In the longer term, given the tightness of the market, any supply disruptive event, such as extreme weather events, could have a major upward effect on prices.
|Source: BMI, USDA. Note: Pre-2010 price calculated using Winnipeg Contract. Price converted into euros.|