Beginning of 2016/17 MY for the Ukrainian barley market - major trends & forecasts

Last season, the Ukrainian market of feed barley mainly faced the bullish trend due to reduction of the general harvest volumes, slowing down of sales by agrarians, and high competition between grain processing and export-oriented companies. At the same time, Ukraine strengthened its position on the global market as the country-exporter of the grain. Would the reporting trend continue developing in the feed barley segment, and what should the market participants expect in 2016/17 MY? APK-Inform experts are ready to announce their first conclusions and forecasts.

Production, yield and quality of feed barley of the harvest-2016

Feed barley is in great demand on both domestic and export markets, while the planted areas under the grain continue reducing for the second season in a row. The trend mainly formed due to the low level of profitability of barley in comparison with other agricultural crops. In addition, barley has a high acceptance to the weather conditions, which affects the yield and qualitative indices of the grain.

According to APK-Inform estimations, in 2016/17 MY the planted areas under barley decreased by 6.5% compared with last season, and totaled 2.6 mln ha. It should be noted that the planted areas under winter barley for the harvest-2016 significantly reduced (down 23%) to 0.8 mln ha, while the areas under spring barley increased by 3% only - to 1.8 mln ha. At the same time, the general production will reach 8.16 mln tonnes, down 1.6% only compared with 2015/16 MY. The growth of yield indices will somewhat compensate the reporting reduction of barley planted areas. According to our estimations, the yield will increase by 6% compared with the index of 2015/16 MY. Current rates of the barley harvesting campaign in Ukraine confirm the growth of yield indices, which in some regions even grew to 7 t/ha. Sufficient precipitation level in the vegetation period contributed to formation of such indicators. Also, such weather conditions can have negative consequences, which reflected on the grain qualitative indices.

We should note that the issue of barley qualitative indicators of the harvest-2016 is still open. After arrival of the first batches of new crop barley on the market, many market operators reported that the qualitative parameters of the purchased barley completely corresponded to the State Standard requirements (GOST). In particular, barley kernel weight totaled 650 g/L, against the required index of 600 g/L. At the same time, adverse weather conditions, which formed in the very beginning of the harvesting campaign, should have provided its negative effect, and there is a high possibility that some part of the harvested crop to be infected with smut, contains sprouted grains, and has low protein content.

Domestic market: price situation

At the end of 2015/16 MY (May-June of 2016), the purchasing prices in the market segment did not significantly change, and were quite high - 3550-3900 UAH/t CPT (2850-3200 UAH/t CPT in the same period of 2014/15 MY). Rather limited supply of old crop barley on the domestic market and low rates of carry-over stocks mainly caused such situation development.

At the same time, in early 2016/17 MY some grain processors significantly reduced their bid prices, and they varied within the range of 3350-3750 UAH/t CPT, against 2950-3350 UAH/t CPT in the beginning of last season.

Shortly before beginning of the season (June 2016) and in July of 2016/17 MY, high competition from export-oriented companies significantly complicated the work of companies-processors, when the market started receiving the first batches of new crop barley. So, many agrarians, especially in Odessa oblast, preferred selling the grain for foreign currency payment with delivery to the port, due to the higher price indices from traders. As a result, feed-milling plants and livestock producers had to take wait-and-see approach.

Export market: situation on FOB and CPT-port basis

For the most part of the second half of the season-2015/16, the grain prices were often declarative. As of the end of the season, the grain prices started declining, and in May 2016 the offer/bid prices on FOB basis mainly varied within 164-166 USD/t FOB. Also, the similar trend was observed in CPT-port terms, and in late May 2016 the purchasing prices fell to 3800-4050 UAH/t, or 132-140 USD/t.

It should be noted that in mid-May, some Ukrainian companies-exporters began forming their starting prices for feed barley of the harvest-2016. In the reporting period, the offer/bid forward prices for new crop barley reached the levels of 160/157 USD/t FOB respectively (with delivery in July-August), and the purchasing prices in CPT-port terms varied within the range of 132-135 USD/t.

However, in June 2016 there was observed some increasing of the export prices, due to activation of trading and purchasing operations of traders after receipt of the first batches of new crop barley on the market. Most exporters increased their purchasing prices by nearly 50-250 UAH/t - to 3950-4050 UAH/t CPT-port, and foreign exchange bid prices - up 3-7 USD/t, to 139-145 USD/t CPT port, to attract of large grain batches with high-quality indicators.

The Head of trading department at the company Cardiff-Trading, Ivan Cherevko commented the price situation on the Ukrainian export market of feed barley: "End of the season in the market segment was characterized with relatively stable prices. At the same time, in the beginning of 2016/17 MY there was observed their significant decline, which was mostly expected. In my opinion, on CPT-port basis in the nearest future the price will not fall, and in July-August period the index will vary within 122-124 USD/t CPT-port. And on FOB terms, the prices will slightly decline to 143 USD/t FOB. At the same time, due to the fact that in Europe the yield index decreased, barley of Ukrainian origin will be in demand, and Saudi Arabia will remain the main buyer."

At the same time, the market segment again faced the bearish trend in terms of the harvesting campaign developing, and increasing of the number of offers of new crop barley. As a result, the offer/bid prices varied within the 146-150/143-146 USD/t FOB respectively (with delivery in July-August), and the purchasing prices at CPT-port basis were usually recorded within 3050-3750 UAH/t, or 118-126 USD/t.

It is worth noting that as of the start of the season, the export potential of Ukrainian barley is forecasted at 3.5 mln tonnes, down 19.7% compared with 2015/16 MY. However, the grain foreign supply index will be surely corrected. For example, in the beginning of 2015/16 MY analysts forecasted the export volumes at 2.9 mln tonnes, but in September 2015 the export forecast increased to 4 mln tonnes.

Expectations of the market operators

In the short-term outlook, most market operators expect for possibility of further reduction of barley prices on the domestic market due to increasing of the number of offers of large batches of new crop barley. Also, the weather factor and estimation of grain quality characteristics will make its adjustments. As for development of the situation on the export market, many traders informed about active signing of new contracts, and the situation on the global market will have its key influence on price formation.

Anna Tanskaya, APK-inform Agency

Comment by APK-Inform analyst, Andrew Kupchenko

Despite reduction of the planted areas under barley in Ukraine, and absence of significant upward trends in the production, traders continue actively exporting the grain. According to USDA estimations, in 2016/17 MY Ukraine will take the 4th position in the rating of global exporters of barley with the indicator at 4 mln tonnes.

Expectation for strengthening of the Ukraine's position in the Asian markets is the major factor of the new season. Thus, in July-May of 2015/16 MY the traditional importer of Ukrainian barley - Saudi Arabia - reduced its imports by 19%, while China increased its purchases in 2.7 times, and Japan - up 5.7 times. At the same time, the general import volumes of barley to China in 2016/17 MY are forecast at 6 mln tonnes. Thus, the market is one of the most promising for Ukraine.

At the same time, two key factors - grain quality and the level of global prices – can slow down the further development of export trading with Ukrainian barley. In terms of quite rainy weather during the vegetation period, we expect for the growth of barley yield and some worsening of its qualitative parameters, which will reduce its competitiveness on the global market. Also, we should note significant reduction of barley price quotations on the global exchange platforms, which will not allow to agrarians to compensate their increased cost of production. There are difficulties with VAT compensation for traders too, which will not improve the bid prices. But agrarians will not significantly lower their prices in order to somewhat compensate their costs, and the prices of Ukrainian barley will not be sufficiently competitive on the global market.