Cash barley values have been under pressure in Western Canada despite wintry conditions. Prices in Southern Alberta dipped to the $146 area in early January and it appears many feedlots have their nearby needs covered. In the previous issue, I was expecting the feed grain complex to stay relatively firm but the recent USDA crop report has set a negative tone for the market. Feed prices will likely stay under pressure now through winter as the market functions to encourage demand. However, don’t get too bearish just yet because there are many factors to influence the price structure.
U.S. corn conditions throughout the summer provided optimal conditions resulting in a record yield of 165.2 bushels per acre. Despite the adverse harvest weather, the USDA did not use a larger-than-expected abandonment rate but did say they will resurvey the crop later in March. Therefore, we may see some adjustments but the fundamental structure is largely set for the time being. The corn crop was estimated at 13.151 billion bushels which was significantly larger than prereport trade estimates. Looking at the demand scenario, it is important to remember we are only one-third through the crop year so we may see further revisions. Ethanol usage is expected to finish at 4.2 billion bushels and we will see an increase in feed waste and dockage over last year. Exports are forecasted to reach 2.050 billion bushels resulting in a carryout of 1.764 billion bushels.
Barley demand is down significantly from last year due to increased imports of DDGS. Given the larger corn crop, we will likely see additional pressure on domestic barley prices. Ethanol production is running near full capacity and this will likely continue given current energy values.
Conditions in South America are very favourable at this time. Argentine corn production was raised to 15 million tonnes, up one million from last month and up from 12.6 million last year. Brazilian corn production is expected to be very similar to last year at 51 million tonnes. Chinese corn production will likely be 155 million tonnes, down 10 million from 2009 but overall ending world corn stocks are expected to finish at 136 million tonnes, down about nine million tonnes from last year. Lower world ending stocks makes the U.S. export program more important and we may see slight increases in upcoming reports.
It is also important to realize that corn prices will remain highly correlated with energy given the ethanol component. Notice that in 2007/08, the corn carryout was 1.6 billion bushels and the market made record highs due to the strong crude oil values.
Fundamentals have less of an influence on price due to the energy component.
Also, we cannot under estimate the influence of investment money flows. U.S. interest rates are expected to stay near record lows for the next six months and the U. S. dollar is still near historical lows. Therefore, investors will continue to look at commodities in general as a hedge against inflation and a higher risk/reward investment given the track record over the past year. Many hedge funds were posting strong results in 2009 and this will draw riskier investors to commodities in general.
Barley and feed grain values will likely remain under pressure into spring. The market will then start to focus on the upcoming acreage and growing conditions in the Northern Hemisphere. This uncertainty usually stabilizes the market and sometimes incorporates a risk premium. The nearby attitudes are justly bearish but the downward trend will be slowed by factors mentioned above. Fundamentally, corn futures should have no problem dropping to the $3 area but the other factors may limit the downside potential.
Gerald Klassen analyzes cattle and hog 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 decision. This outlook may be wrong and could cause adverse financial consequences if decisions are based on this information.