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MARKET TALK – for Oct. 10, 2011

Barley values in the major feeding regions of Western Canada have been percolating higher over the past month. Producer deliveries were quite high during August and early September but have now slowed resulting in a firmer tone to the cash trade. Cattle-on-feed numbers are slowly increasing and export demand appears to be stronger than earlier anticipated. I ve received many inquiries regarding the price outlook for feed grains so now that harvest is finished, I felt this would be a good time to go over the fundamental structure and the price outlook for the 2011-12 crop year.

Statistics Canada estimated average barley yields at 63.3 bushels per acre resulting in production of 8.3 million mt. Despite the larger production, total beginning supplies will be down from year ago levels due to the smaller carry in from 2010-11. Total barley supplies estimated at 9.8 million mt, down from 10.2 million mt last year. After excessive moisture during the spring period, growing conditions during the summer months were very favourable resulting in higher yields and above-normal quality. Therefore, a larger percentage of the crop will move into malting channels this year.

Canadian feed barley exports will be down from last year due to larger supplies from the Black Sea region. However, at the time of writing this article, offshore bids were very competitive with the domestic cash market in non major feeding areas of Alberta and Saskatchewan. While Middle Eastern demand quieted during the Muslim festival of Ramadan, there is a risk that exports may increase from current projections.

Domestic feed usage is estimated at 6.5 million mt, which is down nearly two million mt from the 10-year average. It is important to note that wheat crop will be higher quality in comparison to last year limiting the amount of supplies moving into the domestic market. Therefore, if we add up total feed usage of all grains, Western Canada will need to import about one million mt of U.S. corn or DDGS. Barley prices in southern Alberta and Manitoba need to trade at a premium to U.S. feed grains to encourage imports. The Red River Valley is in a sharp feed grain deficit this year due to the unseeded acres in the eastern part of the Prairies. Cattle feeders in Manitoba will compete with Alberta for supplies in the central regions of Saskatchewan. Barley prices in Morden are trading at a $15 to $20 premium over Lethbridge and this could increase to $30 to $40 over the winter. I m projecting a barley carryout for 2011-12 at 1.3 million mt, which is down from the 10 year average of 2.4 million mt and viewed as historically tight.

The U.S. corn situation is extremely snug due to lower production. Average yields were estimated at 148.1 bushels per acre by the USDA which is the lowest in six years. Production will now be very similar to last year but overall beginning stocks will be down due to the lower carry in. Corn needs to ration demand away from exports and domestic feeding. We may even see a year over year decrease in U.S. ethanol production.

The corn market needs to discourage soft red winter wheat acreage this fall and encourage corn acres next spring. In the short term, there will be harvest pressure as farmers take advantage of higher prices during the fall and sell their crop. Once the U.S. harvest is finished, the corn market will likely move back up to the higher levels until the South American production is more certain around the March timeframe. Traders will then start to focus on U.S. acreage for 2012 and we will likely see a three-to four-million acre surge pressuring new crop prices and pulling down old crop values. Keep in mind, once half of the U.S. corn demand is satisfied, the upward momentum will shift and the bulls will no longer be in the driver seat.

In conclusion, barley prices have potential to strengthen through fall and winter. Canadian domestic barley demand peaks in late March and then starts to decline; prices are

expected to follow this seasonal pattern. Be careful over the next six months because when a market rations demand, prices are extremely volatile. Longer term, larger corn and barley acres next year will weigh on old crop prices and pressure the market into the fall of 2012.

One caveat on this outlook is that the feedgrains complex cannot afford a crop problem in South America or we could see new historical highs. Readers should stay close to our feed grain update in winter because we will have a good idea of Southern Hemisphere production and a better idea of upcoming Northern Hemisphere feed grain acreage.

I ll go out on a limb but if all goes well, I wouldn t be surprised to see corn move under $4 per bushel in October of 2012. This could be extremely bullish longer term for feeder cattle prices which I ll cover in the next issue.

GeraldKlassenanalyzesmarketsinWinnipegandalsomaintainsaninterestinthefamilyfeedlotinsouthernAlberta.Hecanbereachedat [email protected] or204-287-8268.

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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