I’ve received many inquiries in regards to the feed grain outlook. Feedlot pen closeouts have moved into red ink and many operators are now wondering if they should extend coverage on feed wheat and barley. The feed grain complex experienced a sharp rally during the early-summer drought period only to relax as late-July rains enhanced crop prospects. We are now moving into the final stages of harvest and traders are more comfortable with crop prospects the fundamental structure for the 2015-16 crop year. Therefore, I thought this would be a good time to discuss the fundamental structure for barley and provide an overview of the feed grain complex.
Statistics Canada estimated Canadian barley production at 7.3 million mt on its July survey which was similar to last year’s crop size of 7.1 million mt. However, due to the year-over-year decline in carry-in supplies, total stocks at the beginning of the crop year are estimated at 8.3 million mt, compared to 9.1 million mt on August 1 of 2014. Canadian barley exports are projected at 1.0 million mt of which will be mostly malt barley to Japan. Overall domestic demand will be marginally lower than last year resulting in a carry-out of 0.9 million mt, which is down from the 10-year average of 1.8 million mt.
There are four main differences between the current and previous crop year. First, last fall Alberta and Saskatchewan experienced adverse weather during harvest downgrading the wheat crop. This year, feed wheat supplies will be down from year-ago levels because the crop is higher quality. Secondly, malt-quality barley was down sharply last year but in 2015-16, farmers with malt-quality barley will try to sell their barley for malt and receive a premium over feed. The Canadian dollar is also weaker which will hinder imports of U.S. corn and ddgs. Finally, barley available for feed usage is estimated at 5.2 million mt, down from 5.7 million mt during 2014-15.
Therefore, at the time of writing this article, feed barley in Lethbridge was trading at $215/mt delivered while feed wheat was moving at $225/mt. The barley market needs to encourage the use of alternate feed grains by eventually trading at a premium to feed wheat. Higher prices are needed so that domestic demand slows down. I’m forecasting a $30 to $40 rally in feed barley over the winter period for these reasons.
Canadian non-durum wheat production was estimated at 20.1 million mt, down from 24.1 million mt in 2014 and 31 million mt in 2013. Canadian wheat stocks will drop below the 10-year average at the end of the 2015-16 crop year which could also cause domestic feed wheat prices to strengthen later in the crop year.
The corn market is currently in a very precarious situation. Analysts are continuing to hear a wide range of yield estimates as the harvest progresses. This year, it is very difficult to get a handle on the crop size. The USDA increased its yields on the August report only to decrease its yield estimate on the September survey. My bias is that we’ll continue to see this unstable environment continue throughout the fall and the market will maintain a risk premium due to this uncertainty. We may see some harvest pressure but I don’t see the corn market falling apart longer term and there is also potential for a seasonal rally after harvest. The U.S. corn carry-out is estimated at 1.6 billion bushels which is only marginally higher than the 10-year average of 1.4 billion bushels. Minor adjustments in yield estimates will have a large effect on the price going forward. I believe cattle feeders have to be aware of this risk because any strength in the corn market will spill over into western Canadian feed grain prices.
In conclusion, Canadian barley stocks will drop to historically low levels for the second year in a row. Last year, multiple factors limited the upside in the market; however, I’m forecasting higher prices after the harvest period and producers should be looking at extending coverage on their feed grain requirements. c
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. He owns farmland in Manitoba and Saskatchewan but grew up on a mixed farm feedlot operation in southern Alberta. He can be reached at 204-504-8339.