The feed grains complex has been under pressure throughout the fall season due to larger Canadian barley and U.S. corn production. Now that harvest is wrapped up, the fundamental structure is basically set for the crop year. Barley and corn values also affect feeder cattle prices and the overall margin structure for feedlot operators. Corn futures are currently trading near three-year lows and industry is gauging further downside potential. While Alberta and Saskatchewan feedlot operators have experienced a short period of positive margins, the U.S. feedlot industry continues to struggle in red ink given the record-high price of feeder cattle. I’ve received many inquiries from barley producers and feedlot operators regarding the price outlook for feed grains so I thought this would be a good time to discuss the market influences moving forward.
The USDA estimated corn yields of 160.4 bushels per acre on their November report resulting in a record crop size of 14 billion bushels, up from 10.8 billion bushels in 2012. We now find the U.S. corn fundamentals quite burdensome as the carry-out for the 2013-14 crop year is projected to reach 1.9 billion bushels, up from the 10-year average of 1.3 billion bushels. The market has been functioning to encourage demand and this market sentiment will continue until spring seeding. U.S. corn has been trading into southern Alberta feedlots displacing feed wheat and could displace barley during the spring period.
For 2013-14, the U.S. corn market is factoring 1.4 billion bushels of exports and this is the swing factor. U.S. corn is priced competitively on the world market and export sales are on pace to reach this projection. At the time of writing this article, South American growing conditions are quite favourable but smaller production is anticipated due to lower seeded acreage. There will be less export competition in the latter half of the crop year.
Next spring, many analysts are counting on lower U.S. corn acreage largely due to the expanding soybean area. This will make the corn and feed grain markets very sensitive to growing conditions. While stocks have been replenished in 2013-14, trend-type yields will be needed to keep stocks at comfortable levels. Next June and July, we may see the corn market incorporate a risk premium due to the uncertainty in production.
The Canadian barley crop is expected to finish near 10 million mt, up from 8.2 million mt last year. Barley producers have been steady sellers and feedlots have no problem sourcing supplies. Current elevator bids in the non-major feeding areas reflect prices on the world market which have been relatively low due to larger production in Ukraine, Russia, and the EU. Australia and Argentina also have larger upcoming crops which will limit any upside in world barley prices. Major importers such as Saudi Arabia and North Africa experienced a year-over-year increase in production lowering their import demand.
My price outlook for the barley market is neutral. Cash barley has been trading in the range of $180/mt to $185/mt delivered to the feedlot in the Lethbridge area. The market will likely stay in the range of $175 to $200 over the winter period. Feedlot inventories in Alberta and Saskatchewan reach seasonal highs in January through April but then start to decline in May. Offshore movement of feed barley will be limited until March. This price structure will keep feeder cattle well supported from a margin perspective. During years of large corn crops, there is usually a small seasonal rally in corn from mid-November to mid-December after harvest selling pressure has subsided. Don’t get overly bearish on the market at this time. All the price negative news has been factored into the market and the bearish traders need to be fed daily for a market to move lower.
From March 2014 forward, the market focus will change from burdensome carry-outs to upcoming seeding conditions and production potential for 2014. A smaller South American corn crop and a year-over-year decline in U.S. corn and Canadian barley acres will underpin feed grain values. The feed grains complex will be extremely sensitive to growing conditions in the Northern Hemisphere.
Gerald Klassen analyzes markets in Winnipeg and also maintains an interest in the family feedlot in southern Alberta. He can be reached at [email protected]