It’s that time of year when I receive many calls from cattle producers with regard to the price outlook for feed barley. This past winter, feed barley in southern Alberta has readily traded in the range of $155/mt to $165/mt delivered, while values in central Alberta are usually a $10/mt discount. The 2016-17 crop year was rather unique in that many finishing operations were using a fair amount of feed wheat or feed durum in the rations. Extreme rains last summer caused a large portion of the western Canadian wheat crop to contain high levels of vomitoxin. The world was awash with feed wheat this past year making it difficult to move this lower-quality wheat offshore; therefore, farmers had limited options and had to sell into the domestic feed market. However, looking forward, there are a number of variables that will influence the price of feed grains in Western Canada. I thought this would be a good time to discuss some of the risk factors that will influence the barley market for the 2017-18 crop year.
To start off, the Canadian barley ending stocks for 2016-17 will likely finish near 2.4 million mt, which is above the 10-year average carry-out of 1.7 million mt. A carry-out above the 10-year average usually results in prices under the 10-year average, which we’ve seen this past winter.
Statistics Canada will release their first indications of seeded acreage on April 21, after our press deadline for the May issue of Canadian Cattlemen. This provides a starting point to estimate production and the fundamental structure. As I write this, acreage is a large uncertainty with some analysts calling for a year-over-year decline in acreage while others are suggesting acreage could increase. I’ve attached a supply and demand table below. I will discuss three potential case studies by varying the acreage and the potential price outlook for each.
The first case incorporates a year-over-year decline in acreage of 10 per cent. Using an average yield of 65 bushels per acre, production would finish near 7.3 million mt. Without going into details of the demand, the overall carry-out would finish near 1.7 million mt which would be similar to the 10-year average. This would be considered a slightly bullish scenario with Lethbridge values expected to trade in the range of $190/mt to $210/mt delivered during the 2017-18 crop year.
The second case uses an acreage base of 6.4 million, which is the same as last year. Using an average yield, production would finish near 8.2 million mt and the carry-out would come in at 2.3 million mt. This would be considered a neutral outlook from current levels as supplies would remain above the 10-year average. The final case study uses a 10 per cent increase in acreage causing production to surge to 9.0 million mt. In this scenario, the carry-out would swell to 2.9 million mt and it would be considered bearish from current price levels.
Over the past few years, Canadian feed barley prices have been highly correlated with the U.S. corn market. Despite limited imports from south of the border, the corn market tends to influence the world feed grain complex. On March 31, the USDA estimated U.S. corn acres at 90.0 million, down from 94 million last year. The fact that acres are below year-ago levels will make the feed grain complex extremely sensitive to growing conditions, especially during the key pollination season during July. The sharp year-over-year increase in South American production will lower export demand for U.S. corn. This takes some of the upside potential off the corn market even if adverse conditions materialize. However, the corn market will have limited downside in the short term until the crop is more certain and I’m expecting the corn market to incorporate a risk premium during the summer due to the uncertainty in production. Cattle producers also have to remember at this stage, analysts factor in a normal quality wheat crop whereby 80 per cent of the wheat grades in the top two milling categories, limiting the amount for feed.
In conclusion, feeder cattle prices have been supported by lower feed grain costs in Canada and the U.S. Strength in barley and corn values will weigh on the feeder cattle market. My bias is that we’ll see slightly stronger barley prices in the upcoming crop year. Lower feed wheat production and the potential for a tighter corn fundamental structure will be supportive for Canadian barley values.