The pricing of barley in the Northern Cape production regions

Abstract

The producer always has a need to diversify. Barley offers such a potential, specifically with the South African wheat industry on a decline. Innovative pricing mechanisms were designed by the barley industry during the course of 2009 and phased in thereafter. The price of malting barley was linked to the SAFEX wheat futures price. After much deliberation, the price of barley to producers in the Cape (mostly Southern Cape) is now determined by, inter alia, converting the SAFEX wheat price by a factor of 1.02. The formula for the Northern Cape producers was different and it was decided that a factor of 0.92, thus an 8% discount, should apply. However, production in the Northern Cape is still limited and although the factor looked reasonable to producers, it now appears that after three years, and much deliberation between existing and potential barley producers, there is a view that the production of barley is unfairly penalised. According to some producers, with this ratio there is limited incentive to produce and expand the production of barley. This research determines whether the 8% price discount relative to wheat is adequate for the Northern Cape irrigation producers. Is it enough to encourage the producer to plant barley? Comparing the production costs between barley and wheat only forms one part of the study, all other factors that involve the risk of producing malting barley vs. wheat were analysed. If possible these risks are quantified; alternatively it is systematically weighed in the production process between barley and wheat. Alternative production options for producers as well as alternative sourcing possibilities, both inland and internationally are probed. The research includes an overview of the international malting barley industry including the origin of barley, its uses, the technical composition of barley, leading producers and importers, cultivar and quality differentiation, feed barley against malting barley and price determination. A more in-depth analysis is done of South Africa and the irrigation areas vis-à-vis the global industry. The primary focus of the research involves a compatible analysis between the production of malting barley in opposition to that of wheat. Apart from production costs various other factors are also analysed through a quality assessment process. This includes, but is not limited to, aspects such as, grading standards, cultivars, premiums, lodging and feed barley. Production cost data obtained from GWK and Senwes indicate that producers earn substantially more from the production of barley than from wheat. Also, when the two sets of numbers are compared, barley is a better proposition against wheat in the GWK area as the gross profitability is 148% higher per hectare than in the Vaalharts area which stands at 57%. These, however, are not the only benefits, the benefits of an early maturing crop and fusarium resistance, rank as two of the main additional advantages in a high intensity production environment. Contrariwise, there is no doubt that the production of barley requires a higher degree of management skills and commitment. Lodging and the possibility of a downgrade to feed barley were listed as two of the key problem areas. In the medium and long term, producers will benefit from alternative buyers and uses that are entering the industry. Even only a slightly more diversified industry on the demand side will be healthy in the long run. Prices currently paid by SAB based on the SAFEX wheat price are competitive when compared to the import cost of malting barley. In conclusion, producers will greatly benefit by pro-actively launching a structured programme in the collection, processing and interpretation of data, whether limited to the irrigation areas or industry wide.