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Tight barley supplies will encourage corn imports

Market Talk with Jerry Klassen

Feed barley prices have been under pressure through the harvest period as yields across Western Canada have come in better than expected. It appears that the drier conditions in the southern regions of Alberta and Saskatchewan were more than offset by timely rains in the central and northern areas of the provinces. Barley selected for malt production is also much higher than earlier projections. Feedlots in the Lethbridge area were buying feed barley in the range of $190/mt to $195/mt in early September while Red Deer operations were showing bids from $180/mt to $185/mt delivered. I’ve received many inquiries from cattle producers with regard to the feed grain outlook; therefore, in this article I’ll discuss the fundamental situation and the price forecast for the next six to eight months.

Statistics Canada estimated the 2017 barley crop at 7.2 million mt, down from the 2016 production of 8.8 million mt. The average yield was pegged at 63.2 bushels per acre, down 10 bushels per acre from last year but up three bushels per acre from the 10-year average. The crop quality also came in better than anticipated. The favourable conditions in central and northern Alberta and Saskatchewan more than offset the drier regions in the south. It appears that malt barley production will be about 2.5 million mt to 3.0 million mt. This will be consumed for domestic processing, and exports of 1.45 million mt will be mostly malt quality barley. This leaves about 5.5 million mt for domestic feed usage. I’m forecasting a carry-out of 1.0 million mt which is considered historically tight. Notice the 10-year average carry-out is 1.7 million mt so if stocks are below the 10-year average, prices are usually above the 10-year average.

[1] Includes barley processed domestically and then exported as malt. 10-year average is 2005 through 2014.

Given the smaller crop, the function of the market will be to ration demand through higher prices later in the crop year. Approximately 85 per cent of the wheat and durum crops will grade in the top two milling categories. The burdensome feed wheat supply from last year’s production has been absorbed and feed wheat is now trading at a $15/mt to $20/mt premium over feed barley. This will eliminate the use in feedlot rations. Therefore, this means that barley prices in southern Alberta will have to trade at a premium to imported U.S. corn and distillers dried grains with solubles (DDGS). This will make the barley market highly correlated with the corn futures market.

The USDA estimated the corn crop at 359.5 million mt (14.1 billion bushels), which is down from the 2016 production of 385 million mt (15.1 billion bushels). In 2016, Brazil had a major drought on their second corn crop which resulted in lower exports; however, in 2017, both Argentina and Brazil experienced record corn production which will result in sharp year-over-year increases in their exportable surplus. This will take market share away from the U.S. The USDA is projecting the 2017-18 corn exports at 47.5 million mt, down nearly 10 million mt from last season. Therefore, the corn market will function to encourage demand which will make U.S. supplies more prone to be railed into southern Alberta.

At the time of writing this article, U.S. corn was quoted at $215/mt track southern Alberta. The U.S. corn harvest will move into full gear later in October so the market may experience harvest selling pressure at this time. However, this means that Lethbridge barley will have to trade at around $210/mt to $220/mt in late fall or winter. Given the historically tight carry-out, the barley market may have to divorce from the corn market during March through May of 2018 which could result in prices as high as $240/mt delivered Lethbridge.

Source: USDA

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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