I’ve received many inquiries regarding the feed grain outlook moving into the fall period. In the previous issue, I mentioned that corn and barley markets had potential to move higher if a minor yield problem materialized. Throughout May and June, a large portion of Alberta and Saskatchewan received less than 40 per cent of normal precipitation. At the same time, excessive rains have tempered corn yields in the eastern portion of the U.S. Midwest. Lethbridge-area barley prices have rallied nearly $50/mt from the early-spring lows; December corn futures reached a high of $4.50/bushel in early June after rallying nearly $0.90/bushel. Feeding margins have now come under pressure and feedlot operators are questioning future market direction. Cow-calf operators have seen feeder cattle prices stagnate through the summer given the uncertainty in feed grain prices. Therefore, I will discuss the price outlook moving forward and potential risk management strategies.
Statistics Canada estimated barley acres at 6.5 million on its June survey which was basically the same as the previous April survey. However Canadian barley production is now estimated at 7.0 million mt which is down from my earlier estimate of 7.9 million mt back in spring. Drier conditions have lowered yield expectations resulting in a sharp decrease in production. Given the lower carry-in stocks from the previous crop year, total supplies as of August 1, 2015 are estimated at 8.0 million mt, down from 9.1 million mt on August 1 of 2014. The 2015-16 barley carry-out has potential to dip down to 0.8 million mt, which is historically tight.
Given the lower production, the function of the barley market is to ration demand through higher prices and encourage the use of alternate feed grains. During the 2014-15 crop year, abundant feed wheat supplies tempered the upside in the barley market but it appears that Western Canada will have a high-quality crop this fall. Therefore, the market needs to encourage the imports of U.S. corn and DDGS. This will cause the domestic barley market to trade at a premium to imported corn or DDGS prices after the harvest period.
The USDA estimated corn acres at 88.9 million on its June survey, which is down from 90.6 million last year and marginally less than the 10-year average of 89.0 million. On the July USDA report, the USDA left the yields unchanged from the trend forecast at 166.8 bushels per acre. However, adverse wet conditions have plagued some major eastern Corn Belt growing areas. Many analysts are forecasting a slightly lower yield and a minor downward revision in harvested area. Without going into detail on demand projections, one can easily justify a 1.3-billion-bushel carry-out, compared to the current USDA estimate of 1.6 billion bushels. Notice that the 10-year average carry-out is 1.6 billion bushels so the market is going to experience further volatility for the remainder of the growing season. We will inevitably see some harvest pressure but it will also depend on the U.S. export program during the fall period.
At the time of writing this article, the U.S. winter wheat harvest was in the final stages and the world was awash with wheat. Russian and French wheat is trading into Central America and Mexico limiting export movement for Canadian and U.S. wheat into these destinations. France and Germany have also experienced a drier summer tempering corn and spring barley yields. A few cargoes of South American corn have traded into the eastern U.S. destinations. Australia appears to have adequate moisture and longer term, the focus will be on South American growing conditions. Western Canadian domestic feed wheat prices are higher than milling wheat in the major feeding regions. The recent rally in corn and adverse dry conditions in Western Canada have caused abnormal world trade flows and domestic consumption behaviour (milling wheat moving into feed channels). This is tempering the upside in the feed grain market for the time being, while the weaker Canadian dollar is supportive.
In conclusion, I feel the barley market will remain firm and has potential upside after the harvest period. The corn market may have some volatility ahead but I feel the downside is limited. This will take the steam out of the feeder cattle market if fed cattle prices don’t offset the strength in feed prices.