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Feed Grain Prices Strengthen On Russian Export Ban – for Sep. 6, 2010

Barley values in Western Canada continue to percolate higher as feedlots in southern Alberta were paying $168 this past week. In the previous issue, we discussed drought-like conditions in Russia and Ukraine. While many traders were factoring in a Russian export ban back in July, the full effect on the world trade is starting to be felt in Western Canada.

The Canadian barley carry-out has potential to drop under 1.2 million mt, which would be the tightest carry-out since 1995-96 crop year. The function of the barley market is to ration demand and barley prices in southern Alberta will trade at a $15 premium to delivered U. S. corn values. This will make barley highly correlated with CBOT corn futures. Given the lower Canadian barley production, Western Canada needs to import 2.5 to three million mt of alternate feed sources such as DDGS and U. S. corn. (Similar to the drought years in 2001-02 and 2002-03.)

The USDA increased its corn yield projection to 165 bushels per acre, up from 163.5 bushels per acre on the July report. Production could now reach 13.365 billion bushels, up from last year’s crop size of 13.110. However, larger demand projections have done more than offset the increase in yield. First, ethanol consumption for 2010-11 is forecasted at 4.7 billion bushels, up 0.2 billion bushels over last year. Secondly, the Russian situation has caused the U. S. export forecast to increase over last year by 0.1 billion bushels. The U. S. corn carry-out for 2010-11 is now projected at 1.312 billion bushels, compared to 1.373 billion bushel in July and 1.426 billion bushels for the 2009-10 crop year. This will be the lowest carry-out in the last four years.

On Thursday, August 5, Prime Minister Vladimir Putin announced the Russian cereal export ban, which includes wheat, wheat flour, barley, rye and corn. The ban will take effect from August 15 to December 31 and Russia will decide after its harvest whether to extend the ban into 2011. Russia was the third-largest wheat exporter last year compared to Canada’s ranking of sixth. Russian and Ukraine wheat was the price leader for feed and milling-quality wheat often trading at significant discounts to North American values. We now find a major exporter is out of the world market for an uncertain time period.

Earlier in June, the domestic Canadian barley market was showing a significant premium over export values but the price structure has now changed. It is very difficult to get a handle on the export barley market at this time. There is a certain amount of barley demand in the Middle East that is relatively inelastic; therefore, we may see Canadian feed barley exports in the 2010-11 crop year despite the historically low domestic production.

In addition to the Russian situation, major exporters are contending with lower supplies. European production will likely come in near 54.8 million mt, down from 61.3 million mt last year. Australia is also contending with drier conditions in the Western Region. Current estimates suggest that Australian barley production could be down 1.2 million mt from last year at 8.3 million mt. Looking at Former Soviet Union countries, Ukraine production is projected to finish at 8.8 million mt, down from 11.8 million mt last year; the Kazakhstan crop is also down 1.3 million mt from year-ago levels finishing at 1.3 million mt and Russian production is down sharply at nine million mt in comparison to 17.9 million mt in 2009. Adverse conditions in Middle East have resulted in greater import demand from countries like Algeria.

In conclusion, we are seeing significant decreases in production from major exporters resulting in stronger demand for U. S. corn. At this time, the U. S. corn crop is developing under favourable conditions. The world is in a state where the market has become much more sensitive to production changes due to the ethanol consumption in the U. S. South American production will be very important because any type of crop problem could result in a serious jump in feed grain prices, similar to what was experienced in wheat futures this past summer. This could be a major factor influencing feeder cattle prices over the next year as feedlots factor in higher input costs.

GeraldKlassenisacommoditymarketanalystinWinnipegand maintainsaninterestinthefamilyfeedlotinsouthernAlberta.He writesanin-depthbiweeklycommentarycalledCanadianFeedlot andCattleMarketAnalysisforcattleproducersinWestern Canada.Hecanbereachedbyemailat [email protected] or204- 287-8268forquestionsorcomments.

Thematerialcontainedhereinisforinformationpurposesonly andisnottobeconstruedasanofferforthesaleorpurchaseof securities,optionsand/orfuturesorfuturesoptionscontracts. Whiletheinformationinthispublicationcannotbeguaranteed, itwasobtainedfromsourcesbelievedtobereliable.Therisk oflossinfuturestradingcanbesubstantial.Thearticleisan opiniononlyandmaynotbeaccurateaboutmarketdirection inthefuture.Donotusethisinformationtomakebuyingor sellingdecision.Thisoutlookmaybewrongandcouldcause adversefinancialconsequencesifdecisionsarebasedonthis information.

About the author

Columnist

Jerry Klassen

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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