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Agriculture

China tariff on Australia's barley reshapes global trade

Surging price hits brewers and livestock farmers while exporters shift to new markets

A barley crop in Canada. Chinese importers are responding to a high tariff on Australian barley by buying more from Canada, France, Argentina and Ukraine.   © AP

HAMBURG, Germany/MOSCOW -- Barley prices around the world are rising sharply as China sucks in crops from elsewhere after hitting Australia with steep tariffs last year as part of a diplomatic spat.

Prior to May 2020, Australia was China's main barley source. But Chinese importers are now escaping the whopping 80.5% tariff on Australian barley by buying up unprecedented volumes from France, Argentina, Canada and Ukraine. Australian farmers, meanwhile, are finding new outlets.

In the 12 months to the end of this June, China will buy 6.7 million tons or barley, up from 5.5 million tons last year, according to the International Grain Council.

According to the IGC Grains and Oilseeds Index, barley prices in France, Germany, Australia, the Black Sea region and Argentina were $258 per ton on March 5, up 33% on the year and markedly outpacing wheat's 22% gain in the same period.

Prices in Canada's main barley-producing province, Alberta, are at 293 Canadian dollars, up 33% on the year.

"There is a growing demand from China's livestock industry for barley as a substitute for expensive corn and other feed grains," Dan Wang, chief economist at Hang Seng Bank China, told Nikkei Asia.

"The Chinese pork industry is still below the 2017 production capacity, so we will see rapid capacity build-up in at least the next two years, while the demand for barley to make high-end liquor is rising as well, which is a trend that was accelerated post-COVID," she added.

Despite the COVID-19 pandemic, Chinese retail sales of alcoholic drinks by volume were up 23% in 2020, the highest among major markets, according to data compiled by the Financial Times.

The Chinese tariff on Australian barely led to the unprecedented situation of Chinese importers accepting Argentinian feed-grade barley for use as malt-grade barley. The premium between feed and malt-grade narrowed to a historic low of $10-15 as a result.

Argentina's barley exports to China are expected to soar to a record 1.5 million tons in 2021, up from 298,000 tons in the previous year.

"My farmgate price is up $30 per ton, or around 20% year on year, and switching from malt-grade to feed-grade allows me to harvest two weeks earlier, with the gained time used to make extra income with soybeans planted on the same field," said Robert Cameron, a barley producer from Loberia in the southeast of the province of Buenos Aires.

"Many of the farmers here, including me, are using their China-driven income increase to update equipment," he added.

China's tariff on Australian barley is designed to be in place for five years. Argentine market consultant and cash broker Agustin Baque believes that as a result Chinese demand will be up for some time to come.

"Argentine famers will increase the barley planting area by 20% this year, which will mainly come at the expense of wheat because the margins are better," Baque said.

Canada is the other major gainer in the tectonic shift of barley trade. It shipped 1.6 million tonnes of barley to China in July-November 2020, up 189% from the average in the previous five years.

But while Canadian barley farmers are making more money, Canadian livestock farmers are feeling the strain of competing against Chinese buyers.

"Margins are shrinking for cattle feeders as other feed crops, such as corn and feed wheat, are also up, and this is mainly because of China," said Chuck Penner, owner of Canada-based LeftField Commodity Research.

Meanwhile, France-based Strategie Grains expects French barley exports reach a record of 2.9 million tons this year, amid strong growth in shipments to China since January. France in fact is the main European country serving the Chinese market, with UK and Danish exporters deterred by China's strict import regulations.

"As Chinese purchases squeeze barley availability in France, the European barley trade is re-balancing, with UK and Scandinavian barley flowing into the continent," said Brent Atthill, head of Switzerland-based consultancy RMI Analytics.

Ukraine also sharply raised exports of barley to China, with shipments reaching 2.6 million tons in July-January of 2020/21, representing a three-fold year-on-year increase.

Barley is unloaded at a port in China. China's livestock industry is using more barley as a substitute for corn and other feed grains.   © Getty Images

RMI's Atthill said the main losers as a result of the Chinese barley tariff are the China's maltsters and brewers who face higher delivered barley costs.

"Geographically, China should be supplied in part from Australia as it is the most logical source, and as a result the Australian farmer is the other major loser from the tariff implementation," he added.

Yet Australia's barley farmers have been coping surprisingly well with the new situation, having cushioned the initial tariff shock by opening up new markets in South America and the Middle East.

After China, Saudi Arabia is the world's second-largest importer of barley, used to feed its sheep and camels. With Saudi Arabia's traditional barley sources in France and the Black Sea region now serving China, Australia in February secured a significant portion of the Saudi barley tender, at 600,000 tons out of 660,000 tons, according to Thomas Elder Markets in Australia.

"After China slapped the tariff on Australian barley last year, farmers were very concerned, not only because of the tariff but also because [Australia] had a very large crop and the global market was low," said Andrew Whitelaw, an analyst with Thomas Elder Markets.

"Australia has found new homes for its barley and commodity prices are up, so the farmers are happy at the moment and are now looking at what is going to happen with the next harvest in December," he added.

Corey Blacksell, a barley farmer in South Australia's Pinnaroo, said that while China's tariff hike last May hit in the middle of the crop planting, farmers cushioned the impact by switching one-third of their acreage to wheat. Barley can also be stored for up to three years, giving them some time to readjust and find new markets.

"Nevertheless, the whole story shows that it was extremely unwise for the Australia's exporters to develop China as a monopoly buyer for our product," Blacksell said.

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