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Feed grain update

Market Talk with Jerry Klassen

Western Canadian barley prices have been percolating higher throughout the harvest period. At the time of writing this article, Lethbridge-area feedlots were making barley purchases in the range of $245/mt to $260/mt delivered while central Alberta operations were showing bids from $235/mt to $245/mt. It’s important to realize that prices are about $60/mt above year-ago levels. Barley production came in lower than expectations on the recent Statistics Canada crop survey. Drier conditions throughout July and August curbed yield development. At the same time, traders are factoring in a year-over-year increase in Canadian barley exports which will cause the Canadian barley carry-out to drop to historically low levels. The barley market is functioning to ration demand by encouraging the use of alternate feed grains. The bulk of the Canadian wheat crop will grade in the top two milling categories; therefore, Western Canada will have to import about one million mt of U.S. corn. Rail logistics will have a large influence on feed grain prices in Western Canada over the winter. It’s not uncommon for rail movement to run 30 to 45 days behind schedule. U.S. and Canadian grain and oilseed exports have potential to reach record highs during the 2018-19 crop year. Adverse weather over the winter and logical delays will enhance western Canadian feed grain prices.

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Statistics Canada released their July crop survey on August 31. Canadian barley yields came in at 63.1 bushels per acre, down from last year’s average yield of 69.4 and down from the five-year average yield of 65.3 bushels per acre. Production was estimated at 8.0 million mt, similar the 2017 output of 7.9 million mt and down from the five-year average of 8.5 million mt. It’s important to realize that total beginning supplies will drop below year-ago levels due to the lower carry-in stocks.

Canadian barley exports for the 2018-19 crop year are expected to exceed year-ago levels due to stronger demand from China. Australia continues to experience drought-like conditions lowering their crop prospects. European barley production is down sharply from last year because the northern European growing regions experienced less than 40 per cent of normal precipitation in late spring and summer. Russia and Ukraine are also contending with a year-over-year decrease in production. The end result is that world barley supplies are historically tight. In China, the corn imports are heavily regulated; however, barley imports operate in a freer market environment because their annual production is only about two million mt. Recently, western Canadian elevator bids which are sourcing for the export market have been competitive with local feedlot buying interest.

Given the lower beginning barley supplies in Western Canada along with the year-over-year increase in export demand, barley stocks will drop to historical low levels. Domestic feed barley usage will be down about one million mt from last year and this shortfall will have to be made up with imports of U.S. corn.

The U.S. corn crop has developed under favourable conditions and the average corn yield has potential to reach a record 178.4 bushels per acre, up from the 2017 yield of 176.6 bushels per acre. Despite the higher yield, U.S. corn production is expected to finish near 371 million mt which is similar to the 2017 crop due to the year-over-year decline in seeded acreage. U.S. domestic corn demand will be similar to last year but the trade is factoring in a year-over-year increase in U.S. corn exports. Lower production in Brazil and Argentina has made the U.S. the only game in town on the world market. The U.S. corn carry-out will also drop below the five-year average due to the larger exports. On a world scale, corn is also in a rather tight situation. Without going into detail, the USDA expects the 2018-19 world corn carry-out to finish near 155 million mt, which is down from the 2017-18 carry-out of 193 million mt. The world is now in a situation where a crop problem in South America this winter would cause corn prices to reach historical highs. At some point during the South American growing season the corn market will incorporate a risk premium due to the uncertainty in production.

The feed grain market is in a very precarious situation. I’m advising feedlots to have 30 to 45 days of feed grains in storage over the winter in case of rail or truck logistical delays. Ask grain traders and they’ll tell you that it’s not uncommon for rail movement to run 30 to 45 days behind schedule. At the same time, it’s prudent to book the bulk of your feed grain requirements before buying feeder cattle. This is an extra cost which will have to come off the feeder cattle purchase price. Cow-calf operators and backgrounding operators should realize that a surge in feed grain prices will cause feeder cattle prices to drop by 20 to 30 per cent over the winter. Consider yourself warned!

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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