The cash barley market has been percolating higher in Western Canada over the past month. At the time of writing this article, barley prices in the Lethbridge area were quoted in the range of $164 to $168 delivered. The market is starting to focus on upcoming production for U. S. corn and Canadian barley. In the previous issue, I mentioned that barley acres could be down 10 per cent from last year resulting in a very tight fundamental structure for the 2009/10 crop year. The USDA also released their acreage survey on March 31 showing that U. S. corn acres have potential to be very similar to last year at 84.986 million acres. While this is not down as much as earlier expected, new crop fundamentals for corn also look tighter for the upcoming crop year. The feed grains market will be very sensitive to growing conditions and will likely incorporate a risk premium during the summer months due to the uncertainty in production.
Using a yield of 155 bushels per acre, the U. S. corn crop has potential to come in just over 12 billion bushels. While this is only down marginally from last year, total demand is expected to be up almost 500 million bushels due to increased ethanol usage. Domestic demand outside ethanol may be down slightly due to lower hog and cattle numbers. However, ethanol demand is inelastic, suggesting this demand is there regardless of the price. The carryout is projected to finish at 1.4 billion bushels for the 2009-10 crop year, down nearly 400 million bushels from 2008-09.
The U. S. farmer has been a hesitant seller throughout the crop year as prices came under pressure. The futures are now experiencing active farmer selling as the futures hover at the $4 per bushel area. This will provide resistance for the time being but will eventually dry up as we move into seeding. At the time of writing this article, the regular speculative funds were long nearly 20,000 contracts. These funds could build a long position of 40,000 contracts later in spring, adding to the potential strength.
Canadian barley acres are expected to be down 10 per cent but some analysts are now expecting barley acres to be down in the range of 10 to 15 per cent. The function of the barley market will be to ration demand in the 2009/10 crop year. Barley will likely trade at a premium to U. S. corn delivered southern Alberta. Barley prices are expected to be highly correlated with corn and in turn more correlated with the energy complex due to the ethanol demand. Last year, when energy prices made record highs, barley lagged corn due to the abundant domestic supplies. This year will be different due to the lower production.
Crude oil prices have been trading in the range of $44 to $55 per barrel. OPEC has met approximately 75 per cent of their September 2008 target to cut 4.2 barrels per day. U. S. government data showed stocks at highest levels since 1993 during March. It is important to note that from a shipping standpoint, the supplies are tightening. OPEC seaborne exports are contracting and are expected to decline further. The major players are cutting back and the market will feel this during summer when U. S. domestic supplies decrease.
Barley prices have potential to trend higher in the new crop year. The potential tightness for new crop will start to pull up old crop values during summer. Feed grain values will also be extremely volatile as the corn futures incorporate a risk premium due to uncertainty in production. If suddenly, it looks like the U. S. corn carryout could come in under one billion bushels due to adverse growing conditions, corn futures would have potential to move
over $6 per bushel. The feed grain markets have been rather stagnant through winter and spring but expect the volatility to increase. There is a fair amount of uncertainty in upcoming months.
Gerald Klassen analyzes markets in Winnipeg and also maintains an interest in the family feedlot in Southern Alberta. For further information, comments or questions, he can be reached at [email protected]or 204-287-8268
The material contained herein is for information purposes only and is not to be construed as an offer for the sale or purchase of securities, options and/or futures or futures options contracts. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. The risk of loss in futures trading can be substantial. The article is an opinion only and may not be accurate about market direction in the future