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Written November 24, 2008
PFCanada’s sales strategy on barley has been quite aggressive this year. In fact we’re already sold out on feed barley and we heavily favoured using the CWB’s Cash Plus program earlier this year when $6.50-per-bushel opportunities were available on expected malt barley production.
These days one has to look and dig mighty hard to come up with bullish news, especially for feed barley. The immediate demand situation remains rather bleak.
Barley exports stall
Red Sea barley recently traded to Saudi Arabia (largest world importer of feed barley) at US$155 per tonne landed. (That’s about US$125 fob West Coast or about Cdn$152 instore or about $2.05 to $2.25 per bushel to the generic farmer in Alberta.) It’s been a relentless spiral lower, losing perhaps US$75 per tonne in the past month alone. This underscores the extreme competitive pressure from that part of the world. Ukraine with its credit woes must keep selling, or more accurately dumping, feed barley (and wheat) on to the world market.
Suffice it to say feed barley export business from Canada has stopped and cannot work at this level. There’s simply too much barley from the Former Soviet Union and European Union chasing a reluctant buyer who suddenly believes itself to be in the driver’s seat, and who remembers only too well how it perceived being taken advantage of when export prices exploded last year and peaked out in excess of US$450 per tonne landed Saudi. (See barley export prices in the top graph.)
Much of last year’s (2007-08) high priced feed barley export business was done early in the season as soon as it became apparent that the 2007 barley harvests across Europe and Australia were poor. It was done during the very brief period between the Canadian government’s deregulation of the Canadian Wheat Board’s single desk (CWB) for barley and a court ruling that the deregulation was illegal. The CWB, however, honoured the contracts made by the trade and continued to sell barley to Saudi Arabia.
The CWB’s November Pool A feed barley PRO is quoted at $190 per tonne instore, down $3 from the previous month. It’s impossible to say how much feed barley the CWB has pre-sold, but I highly doubt it’s enough to preclude a further decline in the current PRO. Maintaining the PRO far above current international values suggests restricting export sales, which is likely occurring, which may in turn limit the inevitable PRO move lower.
However, in restricting export sales, the CWB then turns more feed barley supply back into the domestic market. In any event, Canadian barley exports are going to be down significantly relative to last year — likely about 1.5 million tonnes lower.
Fewer domestic livestock to eat barley
On the home front, we have to consider the ongoing contraction of the Canadian livestock sector, both in terms of cattle and hogs. The confusing influx of U. S./Canada politics (lately U. S. COOL and BSE before that), wildly fluctuating currency exchange and until lately, high feed grain costs, have combined to inject significant uncertainty into the livestock sector. Herd liquidation has been the result.
Bottom line, given reduced animal consumption units, the overall domestic demand base for feed barley is down at least 1.5 million tonnes from two years ago.
Statistics Canada’s September production estimate of principal field crops placed the Canadian barley harvest at 11.2 million tonnes, two per cent above 2007 output despite a 14 per cent decline in harvested acres. Yield was up substantially this year. I suspect when the final total is in we’ll see an 11.5 million tonne crop.
On balance then, demand for Canadian barley for export and for domestic feed purposes appear limited. A partial offset though is that imports of U. S. corn into the Canadian Prairies will be down dramatically this year, down perhaps to a more traditional 0.5 million tonnes rather than last year’s unusually aggressive 2.1 million.
Nonetheless, domestic consumption is down with fewer animal mouths to feed and feed barley exports will be non-existent going forward. Also, the quality of the Canadian wheat crop in 2008 is more typical than last year. Thus, more feed wheat will be available to provide a competitive option for the feed use market.
As a result, the Canadian barley is quickly moving back to a surplus supply condition with barley carryover stocks in Canada likely rising this year. (See the bottom graph.)
Bear stays put
Bearish world price developments will not go immediately away, nor will the difficulties of the Canadian livestock industry. So Canadian barley inventory rises in the meantime. So what are we to do in this environment?
In order to draw down barley inventory, price needs to be competitive for some extended period of time. In today’s world, that means going down to a pretty poor price — especially if we consider where the export market is today for feed barley. A poor price is also necessary to curb an expansion of production/supply for 2009, both here and abroad.
Under that set of circumstances, it is hard to envision sustained rally potential for the feed barley market until such time market fundamentals change.
Farmers who still hold unpriced feed barley could hold out until the winter season, where typically the colder weather increases per capita animal consumption units. And I wouldn’t talk anyone out of that plan. But with the export market under unrelenting price pressure — though one wonders how long the Ukrainians/Russians can keep giving the stuff away or when their supply runs out — I have to wonder whether farmers might be better off dumping remaining supply sooner rather than later.
Farmer selling on the Prairies remains light, which shows up in basis bids. Barley prices have held relatively flat for the past month. We are likely to see pops to the upside, but it’s hard to suggest anything more than a temporary rally of $10 to $15 per tonne. Otherwise, further downside risk is there.
Cash Lethbridge at $180 per tonne is still high from historical standards. For a farmer in Northeast/ West Central Saskatchewan, this suggests that selling $3 and $3.25 per bushel or so in spot position is the best deal. If a deferred delivery position is what it takes to get that price level, so be it. We are inclined to get it done.