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Strong barley prices will continue in 2021

Market Update with Jerry Klassen: Weather-related impacts and greater demand are key factors

Barley prices, and feed grains in general are expected to remain strong or high going into 2021, which can be a good or bad thing depending on which side of the feed bunk you are standing on.

I’ve received many inquiries from cattle producers regarding the feed barley outlook for the remainder of the 2020-21 crop year. Barley prices have rallied nearly $80 per metric tonne (mt) from the harvest lows. There is an old saying among commodity traders that markets are understood looking backwards but have to be traded looking forward.

As we look toward the 2021 crop year, it is also important to look at how the market structure has changed throughout the past fall and early winter.

Canadian barley crop year-to-date exports for the week ending Dec. 13 were 1.5 million mt, up from 0.9 million mt at the same time last year. China has been the main buyer.

There are two main reasons for its stronger demand. First, China implemented tariffs on Australian barley of nearly 80 per cent back in May of 2020. Australia would typically export three to five million mt of barley to China in any given year.

We knew back in May that this demand would have to be filled with barley from Canadian, French or Ukrainian origins, as these are the only countries with phytosanitary agreements with China. Chinese demand for coarse grains was enhanced during late August and early September when three typhoons damaged their corn, soybean and fresh vegetable crops. In September, media outlets started to report that China was suffering a food shortage and the government was imposing policies such as the “clean plate campaign.”

(This is an interesting policy — the general idea was to encourage citizens to eat everything on their plate to reduce food waste. For example, the Wuhan Catering Industry Association urged restaurants in the city to limit the number of dishes served to one less than the number of diners, so a group of 10 people could only order nine dishes.)

Greater corn demand too

But back to the barley market. In addition to buying Canadian barley, China has been a large buyer of U.S. corn. May corn futures on the Dalian Commodity exchange have readily traded over $10/bushel throughout December. Corn is usually a substitute for barley in Lethbridge but this year, corn prices have moved in tandem with barley. This Chinese demand has come on the heels of lower U.S. corn production. The drier conditions during August and September across the Midwest along with the “El Drecho” storm severely affected U.S. yields. For the week ending Dec. 17, U.S. corn export sales commitments were up 137 per cent from year-ago levels.

Conditions in other major producers are also strengthening values. Russia and Ukraine are having a severe problem with food inflation. Russia will implement export tariffs of 25 euro/mt on wheat, barley and corn starting Feb. 15. The Ukrainian government has an agreement with trading companies that exports of wheat, corn and barley will only reach a certain level, otherwise there will be export controls. European corn, wheat and barley crops all decreased due to a number of reasons which I won’t discuss in detail. And the COVID pandemic has severely influenced European grain logistics over the past year.

In addition to the year-over-year increase in exports, Canadian domestic feed demand has also been running above year-ago levels. Cattle-on-feed inventories in Alberta and Saskatchewan were running sharply above the five-year average throughout the fall period.

Key factors going forward

Looking forward, there are three main factors that will influence the barley and coarse grain markets in general. First is South American production. Drier conditions have plagued the main Argentinean corn region. I’m expecting to see lower crop production estimates over the next month. In Brazil, the corn crop is expected to reach about 110 million mt. However, the main production is from the second Safrinha corn crop, which is only seeded in February. The market cannot afford a problem in Brazil, otherwise corn prices could skyrocket. This second corn crop will be pollinating in May and June.

Secondly, there will be an acreage battle between corn and soybeans in the U.S. The soybean market is functioning to encourage acreage and corn stocks are also going to be under the five-year average at the end of the crop year. Canadian barley stocks will be historically tight at the end of the 2020-21 crop year as well, and the market needs to encourage another million acres of feed barley. Therefore, the corn and barley markets will incorporate a risk premium due to the uncertainty in production during March through May.

In short, don’t look for any reprieve in the barley market over the next few months. The cost per pound of gain for feedlot operators will increase and this will weigh on feeder cattle prices. The market needs to encourage more wheat usage in the feed rations. The wheat market is not bearish and we could see another $1/bushel rally in the milling wheat market this spring. I wouldn’t be surprised to see this barley market rally another $40/mt to $50/mt in Lethbridge. This rally is not over.

About the author

Columnist

Jerry Klassen

Jerry Klassen is manager of the Canadian office for Swiss-based grain trader GAP SA Grains and Products Ltd. and also president and founder of Resilient Capital, a specialist in commodity futures trading and commodity market analysis. He can be reached at (204) 504-8339 or visit his website at www.resilcapital.com.

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