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Tighter corn and barley stocks for 2018-19

Market Talk with Jerry Klassen

It’s that time of year when I receive many inquiries in regard to the feed grain outlook for the 2018-19 crop year. In the previous article, I discussed South American crop conditions and North American projections for the upcoming crop year. Feedlot operators have been factoring higher costs per pound gain which has resulted in lower prices for replacement cattle. Since the previous article, Statistics Canada released their 2018 seeding intentions survey and their stocks in all positions report. We’ve also received the first supply and demand estimates for U.S. corn from the USDA. In this article, I want to continue the discussion and provide an updated forecast on price expectations for corn and barley given the recent government data.

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Statistics Canada released their March 31 stocks in all positions report on May 11. These stocks reports are important because they provide an idea of feed usage from August 1 through March 31 and also confirm the 2017 production. Total barley stocks were estimated at 3.4 million mt, down from 4.2 million mt on March 31 of 2017. Feed usage came in about 400,000 mt higher than last year and barley exports experienced a year-over-year increase of nearly 600,000 mt. The 2017-18 crop year can be summed up as follows: ending stocks will drop to historically low levels due to the decline in production along with increased domestic and export demand. Lower supplies and greater demand results in higher prices.

For the 2018-19 crop year, barley acres came in at 6.1 million mt according to the Statistics Canada survey. Using a traditional abandonment rate and a trend type yield, production has potential to finish at 8.3 million mt compared to the 2017 crop of 7.9 million mt; however, this is still below the five-year-average production of 8.5 million mt. If we use conservative estimates for demand, ending stocks for 2018-19 will come in near 1.3 million mt, which is very similar to the 2017-18 carry-out of 1.2 million mt and still below the five-year average of 1.5 million mt. Barley stocks will remain at historical low levels at the end of the 2018-19 crop year so don’t expect much slippage during the harvest period. At the time of writing this article, Manitoba had received less than 25 per cent of normal precipitation over the past 30 days; eastern Sask­atchewan had received less than 40 per cent of normal precipitation.

Barley stocks are tight and there is no doubt about it. We’ve seen additional imports of U.S. corn in Western Canada and this will likely continue into the new crop year. The problem is that the fundamental structure for corn from the big three major exporters is also historically tight. World corn stocks are projected to fall to a five-year low. A large portion of Brazil’s Safrinha second crop corn experienced less than 25 per cent of normal precipitation during April with the peripheral areas receiving less than 50 per cent of normal rainfall. The USDA is now estimating the Brazilian corn crop at 87 million mt, down from the April estimate of 92 million mt and down from the 2017 crop of 98.5 million mt. The Argentine corn harvest is in the final stages and the crop is estimated at 33 million mt, down from the 2017 crop of 41 million mt. Lower production from Argentina and Brazil will cut down the exportable surplus and increase U.S. offshore movement for 2018-19.

The USDA used data from their March survey to estimate 2018 production. Using a seeded area of 88 million acres, along with a trend yield of 174 bushels per acre, U.S. corn production is estimated at 356.6 million mt, down from the 2017 crop of 370.1 million mt. The USDA used a very conservative demand scenario with regard to domestic usage. However, exports were only shown as 53.3 million mt, compared to the 2017-18 export projection of 56.5 million mt. This may be a bit low given the lower South American production because the world needs to pull an additional one million mt from the U.S.

U.S. corn ending stocks are expected to finish at 42.7 million mt, down from the 2017-18 carry-out of 55.4 million mt. The five-year average carry-out is 39.7 million mt. Given the tighter carry-out, the market will be extremely sensitive to U.S. growing conditions. If yields come in below trend, this corn market could rally quite sharply. If the carry-out comes in below the five-year average, the corn market could be trading in the range of $5 to $6/bushel quite quickly.

It appears, the corn and barley markets will incorporate a risk premium due to the uncertainty in production during the summer months. Traders often factor in a worst-case scenario on yields. Then once harvest begins, the market comes under pressure. This price behaviour in the feed grains complex could cause feeder cattle prices to drop in August and September. Once the corn harvest begins and the crop is more certain, we could see some minor strength in the feeder market. The magnitude of the price drop and correction is difficult to forecast for the feeder market. However, cow-calf producers need to be prepared. Very simply, the 2018 U.S. calf crop is expected to be at 10-year highs while corn ending stocks will drop to five-year lows. This is price negative for feeder cattle.

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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