SABMiller India

Commodity Watch: In high spirits

Personal Finance, 3-Jun-2008
After witnessing a sharp rally in maize and sorghum prices last year, it is time for barley to garner some attention of traders and investors. Prices have already witnessed an incessant rise. Appreciation of more than 60% in both domestic and international barley prices in less than a year have pushed the user industries to take measures to hedge from price escalation.

Normally, two types of barley are available around the world: six-row barley and two-row barley. In two–row barley, extractors can yield 72%-75% malt, while six–row barley can get only 62%-63% malt. Therefore, most of the malting companies prefer two-row barley for higher yield. It is also known Barley Malt. In the international markets, the total availability of barley malt is around 5-5.5 million tonnes. Australia, European Union and Canada are the largest producers and exporters of malt barley.

In the domestic market, the malting industry is finding difficult to procure the right quality of barley. India’s annual production of barley is hovering in the range of 13 lakh tonnes to 13.50 lakh tonnes. Rajasthan contributes the major portion at 65% and Uttar Pradesh 25%. The rest is contributed by Haryana and Punjab.

The traditional methods of cultivation by farmers enable the country to produce only six-row barley. However, most of the malting companies face some problems in procurement of six–row barley. Lower arrivals in major cities such as Sikar, Bharatpur and Chomu in Rajasthan along with vanishing opening stocks have pushed up domestic prices more than 30% during the peak harvesting season (April–June). Normally, most of the malting players stock almost all their annual requirement during the harvesting period. Daily average arrivals of around 2,000 –2,500 bags this year against 4,500-5,000 bags reported last year in the same period in all the major cities have disrupted the inventory management system of malt-barley users.

Waning arrivals are not the only concern of the malting industry. Escalating export demand from the Middle East has also dampened procurement plans.

On the other side, malt demand from beer companies has witnessed a double-digit growth (10%-12%) since the last two years. India’s total barley consumption currently stands at around 13.5 lakh tonnes. From total consumption, around eight-nine lakh tonnes goes for cattle feed, while 4-4.5 lakh tonnes are consumed by the malting industry. Barley demand of the domestic malting industry is increasing with a pace of over 10%-12% per annum due to the rise in beer consumption in India and installation of new beer plants in India. Albeit per capita consumption of beer in India is very low — less than a liter against 37 gallons and 26 gallons of consumption in Germany and the US. But installation of new plants in India by overseas players such as SAB Miller and Carlsberg has resulted in a steady growth in beer consumption in India.

Most of the users of barley malt are opting to importing malt to resolve their problem of sourcing the right quality of raw materials at the right price. Currently, the landed cost of international malt is around Rs 40-Rs 42 per kg, while domestic malt is available at Rs 21 per kg. Higher international prices are primarily on account of restricted supply from Australia along with lower crop estimates from countries like Canada and European Union.

Due to higher prices in the international markets, domestic barley has witnessed a sturdy uptrend over the last two months. Barley Ncdex June 2008 futures closed at Rs 1378.40 on 24 May 2008, gaining about 24% in previous 3 weeks.

Users are now trying to find some solutions to secure supply of barley malt. They are planning to start contract farming of two-row barley to streamline their supply chain management. Contract farming will boost the output as extraction of maltose is higher in two-row barley compare to six-row barley. In fact, the UB group already has a contract farm of 10,000 acres in Punjab, where two-row barley is cultivated. Some other major users such as Sabmiller and Pepsi are also planning to start contract farming. On the other side, users are also hedging by taking long positions in the futures market against their requirement to avoid price volatility.

However, these two measures will take some time to deliver returns. In the short to medium term, barley will witness a sturdy rise in prices on receding arrivals in the physical market.