Malting barley market in Ukraine and profitability of its production - view of APK-Inform*

To begin with we should focus on the qualitative indicators of malting barley, which form the understanding of capacity of the reporting market segment. According to the Ukrainian standards, malting barley has a number of characteristics, which are not standardized for food and feed barley at all.

Among such indicators we also should note thousand kernel weight, which should total 38-40 g for malting grain, and grain size of 92-95%. These indicators show high demands on the uniformity of grain sizes throughout the whole volume of the grain mass. One of the most critical characteristics for receiving of high-quality malt are the following indices: protein content - up to 11%, ability to germinate - 95%, and extractivity - within the range of 77-79%. Of course, there is a number of important indicators, by which barley can be ranked as malting grain, but they are more specific, and have little effect on the market capacity. It should be emphasized that the high requirements for malting barley indices is not just a whim of grain processors, but the economic necessity of the industry. For example, the extractivity index, decreased by 1%, results in losses of nearly 8 kg of dry matter per 1 tonne, which is the equivalent of 80 liters of beer and financial losses of nearly 800 UAH. In fact, for providing of the high efficiency of barley processing, maltsters announce even greater demands on the quality of the grain than the standard ones. Therefore, only the barley, which fully complies with all regulatory requirements, can be considered as malting barley. Not all the barley seeds that were planted as malting grain, can reach the required indices.

The second factor that contributes the further development of the situation on the market malting barley is its domestic processing. As malting barley is the agricultural crop of sector-specific usage, i.e. processing into malt for needs of the brewing industry, it seems quite logical to estimate the segment of processors of the grain.

After analyzing of the situation during recent 5 years, we see that the number of large-scale malting companies in Ukraine shows the constant downward trend, and it has decreased from 45 companies in 2007 to 25 in 2011. It should be noted the rapid growth of the share of three major companies on the market, which increased from 76% in 2007 to 97% in 2011. Thus, these enterprises can serve as the indicator of the market, characterizing its possible changes.

The TOP-3 leaders of malt production in Ukraine includes malting plants of SouffletGroup (Slavuta malting plant, Khmelnitsky oblast), Malteurop, traditional partner of SUN-InBev (Kharkiv and Chernihiv oblasts) and the company "Obolon" (Khmelnitsky and Kiev oblasts).

If we consider the dynamics of malt production by these enterprises during recent five seasons, we should note that in 2007 and 2008 Malteurop dominated on the market, the share of which totaled 39% and 31%, respectively. In 2009 the companies Malteurop and SouffletGroup produced the minimum volumes of malt for the period (a little more than 90 thsd tonnes), which provided the leadership position to "Obolon", which enterprises produced over 160 thsd tonnes of malt, or 44% of the market. In 2011 the situation in the market segment somewhat leveled off, and the companies produced from 108 thsd tonnes to 138 thsd tonnes of malt each, which corresponded to 28% of the market by the company Malteurop, 34% - by "Obolon", and 35% – by SouffletGroup.

Taking into account the above-mentioned factors of forming of the Ukrainian market of malting barley, we compiled the supply and demand balances for the previous five seasons, and the forecast balance for the current season.

It should be noted that Ukraine faces rather significant influence of the weather factor on the productivity of malting barley. As a result, there are marked some fluctuations of the planted and harvesting areas of the crop during recent 5 years. For example, in 2007 due to dry weather during the vegetation period, there was observed one of the lowest yield indices of malting barley, which we estimated at 1.9 t/ha. At the same time, the grain volumes, required to ensure the needs of malting companies, were harvested throughout the areas of 400 thsd ha. In 2008 there was observed quite the opposite situation, and the weather conditions contributed to a significant increase of the yield to nearly 3.5 t/ha, and the harvested areas totaled 217 thsd ha. In the following years, the situation stabilized, and the planted areas under the grain varied at the average level for 5 years - 220 thsd ha. We also should note improvement of the cultivating technologies, which provided some stabilization to the yield level. Thus, despite the adverse weather conditions in 2012, Ukraine got the yield of 2.7 t/ha, which is a good indicator for barley.

In our opinion, the trend will continue in the future. Thus, until 2015 the grain yield can vary within 2.8-2.9 t/ha, and the planted areas under malting barley will remain at the level of 250 thsd ha.

We should note the growth of the total grain supply for malt production among the major trends in the supply and demand balances of malting barley of the recent 3 years. We estimate the figure at 643 thsd tonnes in 2011/12 MY, an increase of 6.5% compared with 2010/11 MY (603 thsd tonnes). We forecast the future growth to 680 thsd tonnes in 2012/13 MY, up 5.8% compared with the total supply of the previous season. The trend will be possible due to rather high crop yield in the current year (2.7 t/ha), despite the unfavorable weather conditions. According to the previous season results, the average crop yield is estimated at 3.1 t/ha, which resulted harvesting of 565 thsd tonnes of malting barley harvest. In 2010/11 MY the grain yield was lower, and totaled nearly 2.1 t/ha, while the general production was estimated at 507 thsd tonnes.

The main article in the supply and demand balances is the usage of malting grain for production of malt, which varied from the minimum level of 489 thsd tonnes in 2009/10 MY to the maximum of 634 thsd tonnes in 2007/08 MY.

During recent 5 years, the average processing volume is estimated at 540 thsd tonnes. At the same time, in the season-2011/12 there was observed a slight rising of the processing volumes of malting barley. In 2010/11 MY the processing volumes of barley were estimated at 496 thsd tonnes, and in 2011/12 MY - 502 thsd tonnes.

In recent seasons there was observed higher interest of agricultural producers in malting barley production, due to more attractive prices and strong demand on the domestic market. According to the monitoring data of APK-Inform Agency, the difference between the bid prices on EXW for malting and feed barley reached 670 UAH/t (2300 UAH/t, against 1630 UAH/t, respectively). So, we forecast a further increase of production and processing volumes of the crop in the following seasons. The forecasted processing volumes are estimated at 530 thsd tonnes in 2012/13 MY. The good harvest of the grain produced in the current year, raising of the level of agricultural technologies used by agrarians, as well as the available capacities of malting enterprises, contribute to developing of the processing industry.

On the other hand, tendencies of the beer production industry serve as the main indicators for forecasting of the processing volumes of malting barley.

Last season, the market segment started showing some decline, even despite holding of the UEFA European Football Championship in the country. But malt production in Ukraine slightly increased, reducing the volume of the raw material imports. In our opinion, it was the rejection to import malt, which can be another factor for the increase of barley processing. But the key factor is the quality of the proposed grain, as most of the brewers import malt made from high-quality barley, which volumes are unfortunately not enough in Ukraine. Besides, we should not forget about the export potential of the finished product - malt. For example, in 2009/10 MY Ukraine exported over 45 thsd tonnes of malt on the markets of Russia, Georgia, Moldova and other CIS countries. Expansion of the selling markets may become another factor in favor of increasing the volume of barley processing, but again the issue of the raw material quality remains active.

As for the foreign trade directly with brewing barley grain, the trading operations can be called as situational only, depending on the volume of domestic production of barley and its quality.

Let's take 2008/09 MY as the example when the highest malting barley supply (887 thsd tonnes) resulted in its maximum exports at 56 thsd tonnes. The significant carry-over stocks (187 thsd tonnes) of 2008/09 MY assisted to provide the high level of exports in 2009/10 MY at the level of 23 thsd tonnes. In the following seasons the total supply of barley slightly dropped. As a result, the export supplies of malting barley were replaced by imports of foreign raw materials, in order to meet the needs of Ukrainian malting companies. The grain imports totaled 23 thsd tonnes in 2010/11 MY, and reached the record of 36 thsd tonnes in 2011/12 MY. But the foreign trade of malting barley is not the major direction of selling, which is apparently again caused by qualitative indices of the Ukrainian grain.

In conclusion, I would like to briefly touch on the costs for growing of malting barley and the profitability of its cultivation. In order to evaluate these parameters, our Agency conducted the polling of more than 300 agricultural producers, specializing in growing of niche agricultural crops, including malting barley. According to the polling results, we carried out the average estimation of costs and profitability in Ukraine.

As for the structure of the malting barley prime-costs the major share – over of 60% is for purchasing of the seed grain, fertilizers and crop protecting agents. The share of the costs for purchasing and application of the fertilizers totals 22%, and for crop protecting agents – 23%, seeds – nearly 17%. According to interviewed malting barley processors, they buy the main part of the raw materials from grain producers with crediting them in seed grain, plant protecting agents, fertilizers and in the terms of 100% repayment of the crop and forward contracts. It allows to agrarians to get high-quality seeds (including imported ones), and fertilizers, and to get the good harvest, that is why they strictly follow the recommended agricultural technologies and rely on favorable weather conditions.

According to the available data, the largest share of enterprises (36%) announced the profitability of malting barley growing in 2012 at the level of below 10%. Respectively. 26% and 13% of the enterprises reported about the profitability of 10-20% and 21-30%. It should be noted some increasing of the share of enterprises that have the profitability within the range of 41-50%, which confirms improvement of agricultural technologies used for malting barley growing, as well as the possibility of obtaining of good yield indices even under adverse weather conditions.

In summary, we can say that malting barley is the most stable of all niche grain and oilseed crops, which has a constant demand on the domestic market. At the same time, the grain has the good potential for further development, which may be caused by increasing of the export volumes of both the grain and malt. But it is necessary to achieve high-quality indicators of Ukrainian barley, which will interest the world malt producers and brewers.

* Printed version of the report of Andrei Kupchenko, grain market analyst of АPК-Inform Agency, at the first International conference "Niche agricultural crops: new opportunities for agribusiness in Ukraine" (December 6-7, 2012, Kiev)