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Mixed outlook for feed grains

Market Talk with Jerry Klassen

I’ve received many inquiries into the outlook for corn and barley prices over the winter period. Feeder cattle prices have strengthened so that it’s difficult to pencil a profit and feedlot operators are wondering how the cost per pound gain will vary for the next round of feeding. At the time of writing this article, feed barley was trading in the range of $210/MT to $215/MT delivered in southern Alberta; feedlots were showing bids from $195/MT to $200/MT in the central Alberta region. Feed barley prices in Western Canada are expected to strengthen by $15/MT to $20/MT given the tighter fundamental structure. The market needs to ration demand by limiting offshore movement and encouraging the use of alternate feed grains. U.S. corn prices remain under pressure because the supply situation is extremely burdensome south of the border. Imported U.S. corn has been trading from $215/MT to $220/MT in southern Alberta. In this issue, I’ll review the market outlook for barley and corn.

There are four main factors that will cause barley prices to strengthen over the winter. First, approximately 65 per cent of the barley seeded in Western Canada is of malt varieties. Growing and harvest conditions were quite favourable this year, and according to the industry estimates approximately 50 per cent of the crop is malt quality. Farmers with malt quality barley are not willing to sell into feed channels and hold out for higher malt barley prices.

Second, the approximately 90 per cent of the Canadian wheat crop will grade in the top two milling categories. Last year, there was a fair amount of feed wheat and feed durum trading into feed channels. Farmers holding high-quality milling wheat appear to be holding out for higher prices rather than selling into the domestic feed market. Third, domestic feed demand increases over the winter. Cattle-on-feed numbers in Alberta and Sask­­­atch­ewan reach a seasonal high in mid-December and then again in April.

Given the tighter Canadian feed barley supplies, the domestic market needs to trade at a premium to the world market to limit offshore movement. At major seaports, export values are US$25 to as much as US$50 above year-ago levels. Russian and Ukraine feed barley is offered at US$193/MT fob the Black Sea while French feed barley is offered US$195/MT fob the Atlantic Coast. Canadian domestic prices are only a small premium above world values so the strength in the export market will continue to support Alberta feed prices.

While the market is bullish for barley, it’s bearish for corn prices. The USDA estimated average corn yields at 175.4 bushels per acre, which is a record. Despite the year-over-year decline in acreage, total beginning supplies are estimated at 16.9 billion bushels, about the same as last year. Without going into details of demand, the 2017-18 U.S. corn carry-out is projected to finish at 2.5 billion bushels, up from 2.3 billion bushels last year and up from the five-year average of 1.6 billion bushels. Over the winter, the U.S. corn market will function to encourage demand through lower prices.

Readers may remember that South America is coming off record corn production resulting in a year-over-year increase in their exportable surplus. We’re seeing more competition in the world market, which makes Canada a logical home for U.S. corn. It’s interesting to note that on the recent USDA report, North Dakota yields were increased from 126 bushels per acre to 134 bushels per acre. The drought hurt the wheat crop but not the corn. Western Canada is a major outlet for U.S. corn in the Northern Plains. The Mississippi closes in the northern areas over the winter due to freeze-up. Currently, Brazil and Argentina growing conditions are quite favourable and additional rain is in the forecast. Remember, their harvest is in April and May so this will keep the market on the defensive. One caveat on the corn market is the fact that ethanol demand is coming in larger than anticipated. This can sometimes underpin the market regardless how burdensome the carry-out Another factor to consider is the Canadian dollar. If the Canadian dollar weakens, this would be bullish for feed grains in Western Canada.

In conclusion, feed barley supplies in Western Canada are historically tighter while the U.S. corn carry-out for 2017-18 will be sharply above the five-year average. The barley market needs to ration demand by trading at a significant premium to imported U.S. corn values. This will cause Alberta and Saskatchewan feedlots to switch over to U.S. corn.

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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