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Market Advisor: Large Crops and Low Prices Create Marketing Challenges

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Frayne Olson, NDSU Extension Service Crops Marketing Specialist Frayne Olson, NDSU Extension Service Crops Marketing Specialist
The challenge is to develop a marketing strategy that will generate a favorable net price, meet cash flow needs and limit risk exposure.

By Frayne Olson, Crops Marketing Economist

NDSU Extension Service

Large crops on your farm are a blessing, but large crops nationally and internationally can create financial challenges from falling market prices. Many portions of North Dakota are harvesting the largest crops of barley, spring wheat, durum and canola seen in many years.

However, the relatively low market prices and large protein discounts for spring wheat are prompting farmers to store as much grain as possible on the farm and move additional production into storage at the local elevator when space is available.

The challenge is to develop a marketing strategy that will generate a favorable net price, meet cash flow needs and limit risk exposure. This is not a small task given the volatile markets during the past two years and the forecasts for large U.S. and world production.

This is the first in a two part series focusing on feed and malt barley, plus spring wheat. Part one will concentrate on feed and malt barley, while part two will cover the wheat outlook and the influence of protein premiums and discounts.

Let’s briefly review the recent U.S Department of Agriculture (USDA) reports and then evaluate alternative marketing strategies for feed and malt barley.

The Sept. 11 USDA production report and world agricultural supply and demand estimates (WASDE) report reinforced the view that the U.S will produce a near record corn crop and set a record for soybean production. The WASDE report forecasts total U.S. corn production at 12.95 billion bushels and total soybean production at 3.24 billion bushels. Forecasted use for both corn and soybeans were increased slightly, which results in projected stocks-to-use ratios of 12.6 percent for corn and 7 percent for soybeans.

This compares with the 15-year average of 14.4 percent stocks-to-use ratio for corn and 9.25 percent for soybeans. All of these forecasts were within the range of private estimates but assume continued favorable weather conditions and no significant frost damage in the major corn and soybean states.

The WASDE report left the forecasted production, total use and ending stocks unchanged for U.S. wheat. It is interesting to note that the 2009 projected national average hard red spring wheat yield was unchanged at 40.7 bushels per acre. This is 0.8 bushel per acre higher than last year’s average yield. This estimate may be revised upward once actual harvested yields are compiled.

The most notable change in the wheat situation came from an increase of 4.4 million metric tons (mmt) in estimated total world wheat production. While this increase is relatively minor when compared with the total forecasted world wheat production of 663.7 mmt, the increase came from some of our major exporting competitors. The European Union’s estimated total wheat production increased from 136.3 mmt to 138.5 mmt and the 12 former Soviet Union countries’ estimated production increased from 102.7 mmt to 105.0 mmt. This compares with the total forecasted U.S. wheat production of 59.4 mmt. In short, the U.S. has rebuilt wheat stocks, the world has adequate wheat supplies and two of our major wheat export competitors have more wheat to sell. The international wheat market will remain very competitive for the foreseeable future.

So what does this mean for North Dakota barley prices and what marketing strategies can be used to deal with the current situation? The initial yield and quality reports for North Dakota barley are excellent because of very good yields, high percent of plump kernels and low protein. A quick survey of local elevator bids across the state shows that both feed and malt barley are priced at the same levels and small loan deficiency payments (LDP) still are available.

The large volume of high-quality barley has shut down the malting barley marketing channels temporarily and the feed barley market has not been able to absorb the extra bushels. Spot market prices have fallen dramatically. This has compelled farmers to store barley until buyers become more active. The short-term strategy many farmers are using is to store as much production as possible and wait for prices to improve. The key questions are when barley prices will recover and what can be done in the interim?

Feed barley prices are closely linked to corn and dried distillers grain (DDG) prices, with feed barley typically valued at 80 percent to 85 percent of corn. A post harvest price recovery from current levels is likely before the end of the calendar year, but the outlook for a large corn crop and continued pressure from the malt barley market will limit the upside potential for feed barley. If you are considering feeding barley to your own livestock, be sure to check on LDP availability with the local Farm Service Agency (FSA) office before feeding.

Determining the trends in malt barley prices is more difficult. A minor post harvest price recovery similar to feed barley is likely. However, the domestic malt barley market has adequate supplies under contract and will not need to bid aggressively to access additional bushels. The international market for feed and malt barley has the potential to purchase additional U.S. production and reduce inventories, but there will be strong competition from the Ukraine, Europe, Canada and Australia.

If the international sales volume does not increase, the price for malt barley may not see any significant improvement until the summer of 2010. Until the market prices recover, Commodity Credit Corporation (CCC) loans can be used to provide needed cash flow at a lower interest rate than commercial operating loans. The major unknown is whether prices will improve significantly within the nine-month loan period. Look to export sales volumes as an indicator for price direction.

For those farmers who have malt barley contracts, carefully recheck the contract provisions and fully understand the quality specifications, delivery requirements, storage payment schedules if available and whether authorization is needed to market contract overrun. CCC loans are available for malt barley priced under a marketing contract as long as the farmer maintains “beneficial interest” in the crop. The county FSA office will need to review the contract terms to verify that beneficial interest has been maintained before the commodity loan can be approved. Once again, CCC loans can provide needed cash flow until the contracted bushels can be delivered.

To summarize, a minor short-term recovery in feed and malt barley prices is expected but will be limited because of the large barley and corn crops. A killing frost in the major corn and soybean-producing region would lift both feed and malt barley prices higher. The international market has the capacity to reduce barley inventories, but competition for other exporters will not allow large price rallies.

For more information, visit my Web site at http://www.ndsu.edu/cropeconomics.


NDSU Agriculture Communication

Source:Frayne Olson, (701) 231-7377, frayne.olson@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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