De Pape is an owner of Integrated Malt Barley Management Ltd. and is based in Winnipeg.
The Canadian Wheat Board recently announced its Pool Return Outlook for the 2008-09 crop year. At first glance the barley PROs look somewhat attractive but closer inspection shows they could pose a problem too.
The 2008-09 PROs for barley are $235 per tonne for feed barley, $360 per tonne for two-row malt barley and $340 per tonne for six-row malt barley, all basis instore Vancouver or the St. Lawrence, representing the highest barley PROs since the CWB began issuing them during the 1994-95 crop year.
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In fact, the malt barley PROs are significantly higher than the PROs in effect for the current crop year.
And therein lies the problem.
Take a look at two-row malt barley. The current PRO is $290 per tonne. This is meant to be an indication of the revenue two-row malt barley is expected to return to farmers this year, if delivered before July 31 or thereabouts.
But two-row malt barley delivered into next year’s pool is expected by the CWB to return $340 per tonne – a full $70 per tonne, or $1.52 per bushel more.
So the message from the CWB is that you get an extra $70 per tonne if you deliver in the new crop pool. Since the CWB does not control or manage the supply of barley, farmers are free to deliver this year’s barley into next year’s pool if they choose.
So what do farmers do when faced with an extra $70 per tonne just for holding onto their barley a little longer? Those that can do it both physically and financially certainly have the incentive because $70 per tonne sure pays for a lot of storage as well as covers interest costs.
This is only the second time the CWB has issued new crop PROs that exceed the old crop PROs still in effect. The last time was just last year, again on malt barley.
We know what happened then. After the new crop PROs were released heading into the end of the crop year, it was tough prying malt barley from farmers because many were waiting to deliver in the new crop year.
The CWB has said this was the fault of the federal government and its move toward an open market with the promise of higher prices that brings. But the CWB was first to give the signal to hold back deliveries by showing higher prices through its PROs.
That time the price difference was only $35 per tonne. This time, the price difference is much more attractive at $70 per tonne.
Last year’s experience suggests we will see farmers holding back their malt barley from the market once again. The CWB may have single-handedly frustrated itself and the efforts of the malt industry for the remainder of this crop year. Maltsters may struggle once again to get barley delivered before July 31.
Imagine yourself as the CWB or a maltster trying to get barley delivered later this crop year paying the local equivalent of $290 per tonne with the prospect of the local equivalent of $360 per tonne for later delivery dangling in front of farmers.
Perhaps the CWB doesn’t realize it but it has presented the malt barley market with a substantial carrying charge spread. In non-CWB markets like canola, spreads like these are the market’s way of getting people to sell on the basis of deferred delivery. In other words, it’s the market’s way of paying you to store grain.
Is that what the CWB wants farmers to do with old crop malt barley? I doubt it, but that certainly is the signal it’s giving.
As an added insult, two-row barley has a tendency to lose malting quality over time, particularly germination. Therefore, storing it longer than necessary will lower its value to maltsters and could ultimately make old crop barley unacceptable when compared to new crop supplies.
Since the 2007 crop was of generally lower than average quality to begin with, chances are it won’t compete well against the 2008 crop. What may be selected this year likely won’t make it next year.
So those that decide to hold two-row malt barley off the market this crop year to take advantage of a higher new crop PRO need to be aware that they are taking on substantial risks.
And don’t forget, the PRO is just an outlook. By the time next year’s pooling period is over, the net return could be lower than the PRO that was just released.
Unfortunately, the CWB is caught between a rock and a hard place on this. On the one hand, it would be soundly criticized if the new crop PROs were the same as or lower than the current crop PROs. Most people know the current market price for new crop malt barley is much higher.
Also, lower prices would turn farmers away from growing malt barley and the malt industry would suffer from a lack of available malt barley.
On the other hand, releasing a PRO that is higher than the current PRO causes the significant price signal problems highlighted here.
So tell me again why you think pooling works?
