Are We Close To A Barley Boom?

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The price of barley likely does not affect your day to day life unless you're either a hog farmer or own your own beer brewing company, meaning that most of us can be forgiven for ignoring news about the grain commodity.  Indeed, there's not been much news to report over the past months: barley hit a crucial low in October of 2014, dropping to two-year lows, and the price of grain has only improved slightly in the time since then.  As decidedly unpopular as barley may be in comparison to natural gas or silver, it too must live its economic life according to the strict standards of supply and demand.  Several signs on the horizon, furthermore, are indicating that demand will grow while supply struggles to keep up, resulting in the good potential for solid growth in this grain sector.

Barley and Growth: Barely Better

If you watched the price of commodities grow during 2012, you may have noticed a blurb about grains in particular, or perhaps you noticed the price of beer rising dramatically.  Global droughts pushed the price of grain to critical prices, outperforming all other commodities (foodstuff, energy, or metals) in the process.  Barley rose this wave to its peak in summer of 2012 following a poor winter harvest, generating better growth over the previous five-year span than gold and silver at 180%.  Like all climate-dependent foodstuff commodities, high volatility represents the norm for barley.  What went up in 2012 came down hard in the three years since, as the commodity lost half its value in only 24 months.  While the 2014 crash hit investors hard, it paled in comparison to the 2008 crash, where barley lost half its value in just six months.  Today, barley represents a growth project for investors given its ho-hum performance in the past six months (a mere ten percent net gain) as well as the global situations putting pressure on grain farmers.

European Stagflation

Pick all the news you've heard about European markets of late and organize them by "good news" and "bad news".  You'll find significantly more of the latter than of the former as the EU has to play hopscotch with its member-states.  A lack of economic certainty in the European markets has made many farmers invest their time and money into higher-functioning crops than boring old barley.  Given that the EU produces nearly as much barley as the rest of the world combined, their economic needs dictate the available supply of grain more than any other factor on the market.  As Europe approaches the harsh prospect of nill GDP growth and increased joblessness -- five nations have double-digit unemployment -- the production of barley faces critical problems.  A feedback loop of poor grain performance in tandem with poor economic growth makes barley especially unappealing to farmers who make only half as much money per ton today as they did in the grain's heyday of 2012, when barley sold at peak value of $260 per ton.  Alternative cash crops like strawberries or oil-producing mustard seeds provide farmers today with much more economic certainty than staple barley.  As the European market defines the barley supply to the world, it seems clear that less supply lies on the horizon.  What's more, they're not the only suppliers feeling the pinch.

Russia and Ukraine

If you believe in Vladimir Putin's crusade to bring Russia to global relevance, you may believe that the average Ukrainian farmer is better off today than they were this time last year, when Ukraine enjoyed complete sovereignty.  The two nations have found themselves in the world's largest crisis since then, however, and the Russian takeover of Crimea has put the economy of both nations in a particular pinch.  The International Monetary Fund's projections for the Ukrainian economy look downright draconian: no less than 5.5% of their GDP has shriveled up in 2015 following a drop of nearly 7% in 2014 following the Russian invasion (or if you believe Putin, the Russian non-invasion).  2016 might provide more relief with modest economic growth, but that's a long way off for the average grain farmer.  The story here is much the same as it is a few hundred miles to the west in the EU: Russia and Ukraine account for the number two and number three spots in global barley production.  The disastrous Ukrainian economy pales in comparison to the performance of the Russian ruble since the invasion, however.  While the ruble has rebounded in the past two months, it's still down no less than fifty percent in comparison to the greenback in the past 18 months.  Russia's risky business in their neighboring nation(s) makes barley an unappealing prospect for their farm base due to the fact that farmers have rushed to cash in their harvest in order to pay off debts before inflation spirals out of control, ruining their livelihood.  Russia represents the fourth-largest grain exporter on the planet, but access to capital from both private and public sources will cramp their output in the immediate future.

Takeaway: Grain Bubble

While climate in the temperate regions doesn't appear to inhibit barley growth in the near future, the fiscal performances of the three largest barley-growing regions in the world have resulted in farmers taking it firmly on the chin.  Too many farmers producing grain resulted in bumper crops of the past two years, mitigating growth in several foodstuff commodities, and barley in particular.  The classic bubble situation appears to be well underway for barley as limited development coincides with steady demand for a hungry world-wide market.  Getting into grain in the here and now represents a fantastic opportunity to buy low and maintain growth as disappointing winter harvests push the prices higher and higher.  The particular volatility of grain commodities make barley an appealing investment for short-term growth, as more poor news on the horizon could send grain growth upwards at a significant clip.

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