I’ve received many inquiries over the last month in regards to the price outlook for barley and corn. While corn futures have made two-year highs, barley prices have been rather stagnant. Barley values in southern Alberta have been trading in the range of $160 to $170 during the harvest period and farmers in Western Canada were fairly aggressive sellers at harvest. Winter wheat and low-quality spring wheat have also moved into the domestic feed market keeping a lid on the barley market. In this article, I’m going to provide an overview of the fundamental structure which is longer-term supportive for feed grain prices in Western Canada.
Statistics Canada estimated barley production at 8.26 million mt on their September survey which was down nearly 200,000 mt from the August estimate and down one million mt from last year. Yields have been coming in lower than anticipated due to the frost and extreme wet conditions in many areas of Western Canada. Total barley supplies will now be 3.3 million mt below the 10-year average.
Looking at the demand scenario, exports are projected to reach 1.6 million mt. Current export values have been approximately $20 to $30 above domestic prices in central Alberta and central Saskatchewan. Farmers will eventually stop selling locally and move barley through the CWB programs given the current price premium of export values. For 2010-11, I’m forecasting a carry-out of 1.2 million mt which is significantly below the 10-year average. Due to the tighter fundamental structure, the function of the domestic market is to ration supplies away from export channels; therefore, we should see domestic prices trade at a $10- to $20-per-mt premium to export values over the winter period.
The USDA estimated average corn yields at 155.8 on their October report resulting in a crop size of 12.7 billion bushels, which is down from 13.1 billion bushels in 2009. Without going into detail, the corn carry-out for 2010-11 will drop under 900 million bushels. Back in 2007-08, when corn futures reached historical highs, the industry was forecasting a carry-out near 700 million bushels. At that time, the market rationed demand and the carry-out turned out significantly larger but the key is to understand how markets behave given the current forecasts. Strength in corn will keep prices of DDGS well supported at the current levels, also enhancing barley prices.
The Canadian Wheat Board Pool Return outlook for No. 4 CWRS is approximately $4.75 per bushel in central Saskatchewan, which is nearly $0.50 per bushel above domestic feed wheat values. We should see the local feed wheat prices move to equilibrium with the export market over the winter. Don’t count on abundant feed wheat supplies to pressure the domestic barley market given the current wheat export outlook.
World conditions are also enhancing the domestic price structure. Parts of Brazil are suffering from drier conditions and seeding will start in late October and November. The market will be very sensitive to South American production given the lower available supplies in the U.S. At the time of writing this article, the Russian winter wheat regions remain dry and there is still uncertainty if Russia will actually be a coarse grain importer. The U.S. winter wheat area is also quite dry as farmers finish seeding.
Domestic barley prices have potential to rally over the next four to six months. Harvest pressure has been the main feature but barley prices should catch up to the corn market longer term. Next spring, we are going to have some very interesting markets given the acreage competition. Barley needs to encourage production in 2011 which will likely result in higher prices when farmers are making their seeding decisions. World coarse grain markets may incorporate a risk premium due to the uncertainty in production in South America and drier conditions in the winter wheat regions of Russia and the U.S.
Gerald Klassen is a commodity market analyst in Winnipeg and maintains an interest in the family feedlot in southern Alberta. He writes an in-depth biweekly commentary called Canadian Feedlot and Cattle Market Analysis for cattle producers in Western Canada. He can be reached by email at[email protected] or 204-287-8268 for questions or comments.
This material 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.