Finding a buyer and getting a price might be two big challenges facing barley growers this summer.
Pro Market Communications analyst Errol Anderson says a big feed grain crop is in the fields and there may be few buyers for it.
“There’s going to be congestion at delivery,” said Anderson. “Guys really have to work on that delivery side.”
Continuing problems with market access for Canadian beef because of bovine spongiform encephalopathy will mean feedlots might not buy many calves or much feed grain in the fall. That would not only hurt prices but also make barley hard to sell at all.
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“Delivery is paramount – more than price,” said Anderson.
“Storing grain through this environment is a liability, not an investment.”
Anderson said producers should try to sign delivery contracts with buyers. Some buyers may not agree to a flat price because they expect feed prices to fall, but many will be willing to sign basis contracts.
After signing a basis contract, a grower can contact his broker to sell futures to lock in a price.
“It takes two steps to do that, but in this environment you almost have to do it,” said Anderson.
In typical years, producers can often count on selling their crops into the cash market at harvest, and maintain the ability to catch potential price rallies by buying call options.
The cash sale allows the farmer to pay bills quickly while the call option allows him to pocket windfall gains if the price suddenly rises.
But option volumes at the Winnipeg Commodity Exchange for western barley are low, so buying and offsetting calls could be difficult. Corn calls can be used instead of barley calls, but while corn and barley prices often follow a typical spread, there can be divergences that would hurt this approach.
The low liquidity in Winnipeg barley options also makes it hard to use put options to guarantee a basement price if the producer hangs on to his cash crop and the price falls.
“We can’t get the puts done,” said Anderson. Instead, he urges farmers to lock in a price for some of their crop by selling futures.
Alberta Agriculture market analyst Charlie Pearson said feed grain markets will watch the June 26 Statistics Canada report to get a sense of this year’s crop size.
He thinks barley will still have many buyers in the fall and that it will replace corn in Alberta’s feedlots.
“Everybody’s negative on demand, but we have a certain number of cows that were born this spring,” said Pearson. “Regardless of what happens (in the BSE situation) those calves will still have to be fed this fall.”
And if the U.S. border remains closed, Canadian feedlots may end up with more cattle.
Still, Pearson thinks farmers should price some of their new crop barley because the fall market is uncertain.
“Everybody’s wanting a higher price … but from a risk management perspective, if farmers haven’t locked in some barley already, I would advise them to do some on rallies.”
Anderson said there is a chance of a price collapse at harvest, so locking in some fall barley prices and signing a delivery contract make sense.
“Even if you hate the price, at least you have the opportunity to get rid of the stuff.”
