This is the second in a series of six articles FarmLink Marketing Solutions is writing for Grainews regarding Canadian Wheat Board (CWB) programs. FarmLink Marketing Solutions was asked to provide ideas on how to interpret and maneuver around the various prices and signals that farmers face in marketing board grains. FarmLink has been involved with using these programs day in and day out on behalf of the farmers they represent for the past eight years. Instead of just reading about what a pricing option is, we’ll present a real-world example of the implications of choosing one option over another.
This month, we’ll review the malt barley situation for 2010-11. Much talk and debate has occurred about the CWB’s feed barley prices compared to global values during the late summer and fall period, when world coarse grain supply prospects dropped sharply. This caused end users to pay up to get covered on their feed barley requirements, and to look for alternatives to the Russian/ Ukraine supplies they had previously been relying on. Yet based on Prairie cash barley prices and movement opportunities, coupled with ongoing research we do through trade contacts, it appears the CWB didn’t participate optimally in that opportunity.
Why not, one has to wonder? One theory is that if they had, local barley supplies would have dropped quickly, and the fixed price/quick cash combination might have diverted some marginal malt barley into the export feed market, making it more difficult for domestic malting companies to source the supplies that they need for the year. After such a poor harvest season, and an inadequate acreage base, the malting industry would have found itself in a tough spot this fall. Feed prices had already gotten dangerously close to malt price projections even without a big early-season export program by the board.
The malt export market would become even tougher for the board to service post-harvest, and protect the domestic industry’s needs simultaneously. First, like many of us, some early-season pre-pricing was done for risk management purposes and before the world crop problems started piling up, at lower levels than are available today. These dragged down future price potential even further as the size of the pool fell, and those early sales came to represent a greater portion of the total 2010 malt barley crop.
One could surmise that the board’s reasoning for holding back on new sales would go something like this. “We can hardly estimate the size of the barley crop, let alone what damage was done during all that rain, but our malt barley supply estimates aren’t much bigger than what the domestic industry needs to meet its processing requirements in Canada this year. Therefore it would be a big risk selling malt barley for export and relying on the grain companies to deliver it, because they probably won’t be able to select it.”
For the remainder of the 2010- 11 marketing year, this causes us to project fairly limited upside potential in future Pool Return Outlooks (PRO). If something dramatic changes late in the year, it could be possible that new CashPlus pricing opportunities come up, but for the same reasons noted above (what are the chances of finding any malting quality barley even if they do offer a higher cash price in spring?) this is unlikely. The CashPlus program allows for local malthouses to contract a minimum price with growers for deliveries as needed. In the past these opportunities have been spotty and time-sensitive, but tend to always show a premium to the current PRO.
NOWHERE TO GO
Meanwhile, many farmers report having had samples selected lately that weren’t even close to grading malt six months ago. In a coherent marketplace, that could be interpreted as a bullish signal reflecting tightening supplies, even though malt barley selection criteria obviously adjust depending on the level of available supplies. But there are limits, and malt standards are relatively high. What we’re seeing selected these days tells us that they’re at the bottom of the barrel, which means further sales simply aren’t likely at any price.
Letting the maltsters get covered before looking into the fall feed barley export pricing opportunities ensured some stability in the domestic market, but it also removed malt producers’ ability to participate in future marketing opportunities. Therefore we would guess that while prices can always move $10 to $20 per tonne for some unknown reason, our analysis does not point to a much higher malt barley pooled return for 2010-11, irrespective of what happens in other commodity markets or geographies.
The sad fact in all of this is for the few farmers who are sitting on good-quality malt barley. The domestics are covered and the export market is out of play leaving no opportunity for them to access a premium price for the scarce commodity they’re sitting on. The structure of the system isn’t allowing them to capture an accurate valuation for the crop in an environment of scarce supplies and high prices.
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The CashPlus program allows for local malthouses to contract a minimum price with growers for deliveries as needed.