🍺 Your Guide To Investing In Barley, An Important Cereal Grain Commodity Used To Make Beer & Whiskey.
Brief Background
Before wheat became popular, barley was a major cereal grain in ancient times, believed to be one of the first grains to be widely cultivated. Like wheat, corn, and rice, it’s a cereal grain known to be quite nutritious, packed with vitamins and minerals. You might know that barley is a key ingredient used to make beer and whiskey. It’s also used as livestock feed, making barley quite an important agricultural commodity in the world markets.
What Can It Do For You
🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Adding barley to your portfolio means owning an asset that tends to act differently to other asset classes, and even to other commodities. Furthermore, barley can act as a hedge against inflation & a weak US dollar. This is because barley is a food commodity used as livestock feed and in beer and whiskey production. When the economy undergoes inflationary periods, food commodity prices could rise in response to these conditions.
💰 Profit. Barley can certainly undergo cyclical periods, and looking from the price chart below, historically, the overall outlook for barley seems to be quite positive. In the long-term, there are a number of trends that could support barley prices. As with other agricultural commodities, climate change can certainly impact supply, and we’ve already seen headlines and production numbers that have suggested supply shortages. Another trend is emerging market demand. Due to the barley’s versatility (i.e. used as livestock feed and in beer and whiskey production), demand for the grain could certainly grow in emerging economies. However, there are also a number of risks that could put downward pressure on barley prices. These include: potential overproduction in supply due to years of demand outstripping supply (whether that’s due to increased barley subsidies, developments in research on producing a climate change-resistant strain of barley, or other reasons), and potentially lowered demand due to a weakened global economy and/or slower economic growth in emerging economies.
What Affects Barley Prices
There are several key factors that are involved in moving the price of barley:
- 🇪🇺🇷🇺 EU & Russian Production. The EU collectively produces roughly ~40% of the world’s barley. Add Russia, and that number jumps to more than 50%. Any changes in production in these countries can certainly affect prices.
- 🇸🇦🇨🇳 Emerging Market Demand (Especially Saudi Arabia & China). Saudi Arabia and China are two of the biggest importers of barley. As emerging economies grow and expand, demand for agricultural commodities could grow as well.
- 🏛️Government Policy. Things like subsidies and trade policies can definitely have an impact on barley prices. Any changes to EU subsidies on barley can certainly affect production as farmers change their production strategies in response to these subsidies.
- 📈 Stock Levels. Stock levels can certainly play a part in moving prices as it can be a key indicator on supply and/or demand levels, which can then lead to speculation in the market. In recent years, demand has exceeded supply consistently, and stocks levels have certainly dwindled.
- ☀️ Weather/Climate Change. As with other agricultural commodities, climate change (like prolonged drought periods and excess rain) can certainly impact production & therefore supply constraints, resulting in increased prices.
- 🔄 Substitution. As you might have guessed, barley essentially competes with other grains as a source of food, either for us humans, or for livestock. If barley prices rise higher than the others, consumers might switch to the cheaper options, and vice versa.
- 🏥 Health Benefits. Barley pretty much has no known negative effects on human health, and its numerous benefits have been known for a while. As consumers become more and more health conscious, demand for barley could certainly increase.
- 🔬 Research & Development. Research is currently being done to produce a more climate change-resistant strain of barley. Developments in this could certainly counter the effects of climate change and increase production.
- 💵 US Dollar Strength. Like a lot of the other commodities, the benchmark for the pricing of barley is in US dollars. A weak dollar compared to other currencies (i.e. need more USD to buy other currencies) may incentivise foreign buyers to buy (since their currencies are worth more in dollars & so can buy more barley) & drive up demand, increasing prices, and vice versa.
What Is It Used For?
Generally, barley is mainly used as a food source for livestock. However, it’s also used as a food source for us humans, and for malting, brewing and distilling to make a number of alcoholic beverages. Here are some of its uses:
- 🥣 Food Source. Barley is still used to as an ingredient to make a variety of dishes, including soups, stews, salads, breakfast meals, and porridges. Further milling of barley results in barley flour, which is used for baking.
🐄 Livestock Feed. The main use of barley. In some parts of Canada, Europe and the US, barley is more popular as livestock feed than corn. - 🍺 Beverages. Barley is also used to make a number of beverages, both alcoholic and non-alcoholic. These include whiskey, beer, barley teas and flavoured waters.
The Case Against Barley
There are a couple of risks involved if you want to get involved with barley. Firstly, although climate change can certainly cause damage to production and supply, research is currently being done to produce a more drought-resistant strain to help combat this issue. Developments in this could certainly boost production. Furthermore, there is a risk of overproduction by the bigger suppliers due to years of demand outstripping supply. If barley prices become too high, government subsidies may be increased to help boost production, increasing supply in the market, and stabilise prices. Last but not least, the end-products of barley are essentially meat and alcoholic beverages, both of which are linked to economic strength. A weakened global economy, and/or slower economic growth in emerging markets could result in lowered demand for barley, putting downward pressure on prices.
The Case For Barley
Because of barley’s versatility (i.e. used in beer and whiskey production and serves as feed for livestock), demand for the cereal grain is expected to grow, especially in emerging economies such as China and Saudi Arabia. As such, barley can certainly be used as a hedge against inflation and/or for portfolio diversification. Furthermore, in the long term, poor weather (such as prolonged droughts and excess rain) conditions due to climate change can certainly impact production, causing supply constraints and pushing upward pressure on prices. As with a number of other agricultural commodities, we’ve already seen the impact of droughts on production for some countries, and this may get worse. Furthermore, unlike some of the other agricultural commodities, barley has been known for its health benefits, with no known negative consequences for human health. As consumers become more health-conscious, demand for barley could certainly grow.
Popular Ways To Invest In Barley — Pros/Cons of Each
Like some of the other agricultural commodities, you can’t really invest in physical barley. Here are some of the more popular ways instead. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.
- Barley ETNs. Unfortunately, there are no ETFs that focus solely on barley, but there are ETNs that invests in a range of commodities (some with themes, like grains), including barley. Because of this, on occasion, there may be times when the actual price of barley & the price of the ETN may differ since they don’t just invest in physical barley. Regardless, they’re traded on stock exchanges, so they’re pretty easy to buy and sell. Depending on which broker you go with, you may be charged with trading commissions. ETNs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Just be aware that since it’s an ETN, you are essentially buying a bond, an IOU, a debt note, and not in actual, physical barley. Be sure to read the fine print & understand the risks and costs involved.
- Barley Stocks. Unfortunately, there are no public companies that solely focus on producing barley, but there are large public companies with business activities related to multiple grain commodities, including barley. Because of this, you aren’t directly following barley prices since there are other factors at play. As always, you may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what products & assets they have, what research & development they’re currently conducting, and potential expansion plans.
- Barley Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell barley at a specified time in the future with an agreed-upon price. A standard contract deals with 20 metric tons of it! These futures contracts are settled with physical delivery after the contracts have expired. Because you are using a significant amount of borrowed money, even small price changes in barley can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.
TL;DR — Is It The Right Investment For You?
As always, it depends on what your aims are. As relatively versatile grain crop that’s used to feed livestock and for beer and whisky production, barley can be used as a hedge against inflation & for portfolio diversification. In the long-term, as with other agricultural commodities, climate change can have an impact on production, causing supply constraints and putting upward pressure on prices. Furthermore, increased adoption of “healthy living” by health-conscious consumers could certainly boost demand for the nutritious grain. Similarly, demand for barley is expected to increase in emerging economies, such as China and Saudi Arabia. As these countries grow in wealth, consumer demand for the end-products of barley (meats, beer, whiskey, etc.) could certainly grow, which will, in effect, increase demand for barley as well. However, developments in a drought-resistant strain of barley, in addition to potential amendments of existing subsidies in response to higher barley prices, could all contribute to higher production, higher supply, and therefore putting downward pressure on prices. Furthermore, because the end-products of barley are linked to economic growth, a global economic downturn, or a slower-than-expected economic growth in emerging markets could result in lowered demand for these products, and therefore lowered demand for barley.
🧺 If you are considering adding barley to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your barley position so you can take advantage of any volatility in the market.
💰 If you are considering adding barley for speculation and profit, you may want to monitor the factors that affect barley prices mentioned above. You may also want to keep track of monthly reports of world production, consumption & stock levels released by the USDA, so you can keep track of supply & demand. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on barley’s price chart to help consolidate trends and patterns to help with your decision That being said, its prices can also swing unexpectedly and dramatically, so be prepared and have an exit plan in place. It’s worth noting that although historical prices have shown an overall trend of upward movement in prices over the long term, it does not necessarily mean that this will continue to be the case, as it all comes back to supply and demand levels.
As always, if you are unsure, check in with a professional financial advisor before making any moves.
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