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Feed Grain Update

Cash barley prices in Southern Alberta have been hovering in the range of $152 to $156 throughout the fall. Feed grain prices in Western Canada have remained under pressure due to increased imports of DDGS and lower overall feed demand. At the same time, corn values in the U.S. have been percolating higher and this has been supportive for the barley market.

Statistics Canada estimated the barley crop at 9.5 million mt, down from 11.8 million mt last year. Barley exports are projected to reach 1.5 million mt. Black Sea barley prices have strengthened to US$150 per mt fob. To be competitive in Middle East destinations, central Saskatchewan barley bids need to dip down to $75 per mt or $1.63 per bushel. Feed barley exports will remain near minimal levels and malt quality exports will likely make up 1 million mt. The domestic feed barley market is showing a significant premium over export prices. Domestic feed demand is projected to reach 7.0 million mt which is down from 7.7 million mt last year. This is largely due to the imports of DDGS and alternative feed sources. The 2009-10 barley carryout is expected to finish near 2.6 million mt which is slightly above the 10-year average; therefore, look for prices to stay near a 10-year average price which is in the range of $140 to $165.

For 2010, Canadian barley seeded area could be down another five to 10 per cent given the lower returns per acre compared to other crops. This will make barley prices highly correlated with the corn market as alternative feed sources price into the Western Canadian demand. Over the past two years, the barley farmer in Canada has been a reluctant seller until the last quarter of the crop year. This will likely occur again because of the lower barley prices compared to other crops.

At this time, there is a fair amount of uncertainty over U.S. corn production. Late seeding along with adverse harvest conditions has resulted in a wide range of production estimates. There is a high probability that corn production will finish near 12.5 billon bushels when the USDA comes out with their final production estimate this month. The corn market has become very sensitive to changes in supply because of the larger demand. Ethanol consumption has increased each year and the corn market is starting to ration demand away from domestic feed usage and export channels. The U.S. corn carryout has potential to dip under 1.2 billion bushels which is one of the tighter carryouts in the past 10 years. This will make the market more sensitive to the 2010 production and we may see the feed grains rally quite strongly in the spring period. The market cannot afford to have a problem with the 2010 crop otherwise prices could reach back up to historical highs.

In early December, the index funds were long an estimated 380,000 CBOT corn contracts while the regular speculative funds were long nearly 125,000 contracts. Weakness in the U.S. dollar has spurred investment-type buying in all grains and oilseeds. We may see another surge in buying in the new year as portfolios reallocate funds and fresh money comes into the market. Crude oil prices have been consolidating but there is potential for higher prices in the second quarter of 2010. The U.S. economy is expected to move into an expansion phase during this time, increasing demand for energy products. This will support the overall feed grain complex.

Feedlot operators can expect slightly higher feed grain prices over the next six-to eight-month period. Major risks during this time include lower than expected 2009 U.S. corn production, higher energy costs, uncertain South American production and North American acreage changes in 2010. While we may see some dips in the market due to seasonal demand fluctuations, my bias is for a firm market until we get a better handle on 2010 production.

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]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. Do not use this information to make buying or selling decisions. This research could be wrong and cause adverse financial consequences for the individual making ecisions based on this 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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