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Prepare for spring rally on barley and feed grains

Market Talk with Jerry Klassen

Southern Alberta feedlots were buying feed barley in the range of $160/mt to $165/mt delivered over the past month; central Alberta operations were showing bids from $155/mt to $160/mt. Southern Manitoba feed mills have been buying barley with low vomitoxin levels from $155/mt to $165/mt but overall barley usage is limited in this region. Feed wheat prices have been quite variable depending on the quality, and by this I’m referring to the level of fusarium or vomitoxin. Feed durum has traded from $150/mt to $160/mt delivered in Alberta feedlot regions while hard red spring and Canada prairie spring wheat prices are at slight premium.

Statistics Canada estimated the 2016 barley crop at 8.9 million mt, which was up from the 2015 production of 8.2 million mt. Accounting for carry-in stocks and imports, the total supplies for the 2016-17 crop year are estimated at 10.3 million mt, up from year-ago levels of 9.6 million mt.

Barley exports will be mostly malt quality because Canadian feed barley is uncompetitive on the world market compared to Black Sea and Australian origin. Domestic processing demand is relatively inelastic each year but feed consumption will be down from year-ago levels due to the substitution of feed wheat and durum. The Canadian barley carry-out for 2016-17 is estimated at 2.4 million mt, which is up from the 2015-16 ending stocks of 1.5 million mt, and up from the 10-year average carryout of 1.9 million mt. Barley supplies are rather burdensome which will limit any strength in the market.

Approximately 40 per cent of the hard red spring wheat crop was feed grade and up to 55 per cent of the durum crop graded in the non-milling category. So far, there has been limited offshore movement of feed wheat and feed durum. Europe experienced adverse weather similar to Canada resulting in larger feed wheat production. European along with Russian, Ukrainian and Australian feed wheat supplies make the world awash with feed wheat. Therefore, Canadian farmers and merchants with lower-quality wheat and durum have to sell it into domestic feed channels. Keep in mind the Canadian all-wheat crop was the second largest on record reaching nearly 32 million mt.

So far, feedlots have not had difficulty buying sufficient supplies of barley with low vomitoxin levels. Each feedlot can have different tolerances and standards with various discount schedules. Fusarium can be visually seen in the kernel but vomitoxin needs to be tested in a lab. Some studies have shown that heavier beef cattle can use barley and wheat with 10 to 12 ppm (parts per million) vomitoxin without significant changes in weight gain or consumption levels; however, calves and lighter feeder cattle can have problems. Background and feedlot managers will not use higher vomitoxin/fusarium barley for calves and lighter weight feeder cattle. Studies have shown, as a rule of thumb, one per cent fusarium equates to about one ppm vomitoxin but the variance for one per cent fusarium can be from 0.5 ppm to as high as 4.0 ppm vomitoxin. Certain feedlots don’t want barley with fusarium damage over three per cent for this reason. Feedlot margins improved in December and remain rather strong but they still can’t afford any slippage in feed per gain efficiencies. Farmers are encouraged to have their barley and feed wheat tested for vomitoxin.

Canadian barley and feed wheat prices will have limited upside potential until these burdensome supplies are absorbed, largely in the domestic market. Looking forward, there is usually a seasonal rally in late March and early April when road bans come into effect. Farmer selling tends to slow down during this time and limited supplies come on the market during spring seeding. Over the past years, we’ve seen a $10/mt to $15/mt rally in the feed grain prices during this time so feedlots will want to be aware of this potential and take forward coverage in late February or early March. At the time of writing this article, 2017 barley acres are expected to be down five to 10 per cent. Should this year-over-year decline materialize, the market will be very sensitive to growing conditions in June and July. The barley and corn markets tend to incorporate a risk premium due until the upcoming crop is more certain. This may spark a rally in the summer months if adverse growing conditions prevail. Strength in new crop values will pull up old crop prices because the fundamental structure for 2017-18 will be tighter with lower supplies.

About the author

Columnist

Jerry Klassen manages the Canadian office of Swiss-based grain 
trader GAP SA Grains and Produits Ltd., and is president and founder 
of Resilient Capital specializing in proprietary commodity futures trading and market analysis. Klassen consults with feedlots on risk management and writes a weekly cattle market commentary. 
He can be reached at 204-504-8339.

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