Monday, November 15, 2010

Malt Premiums with a Voluntary CWB

Proponents of the single desk fear that if the CWB lost the single desk on malt barley, the malt premium over feed barley would erode to next to nothing.  We’ve all heard it before – the malt premium will be “bid down” to just above the price of feed barley.

Let’s look at this.  First, what is the premium anyway?  

The CWB has said it “shoots for” a $1.00/bu premium over feed.  But as I’ve shown before, in practice the malt premium is much lower.  The CWB’s 2-row malt price averaged only $0.16/bu over domestic feed prices in Saskatchewan.  The 6-row malt barley price averaged $0.15/bu UNDER the lowest priced feed barley in the country.

So, let’s put this in perspective.  We’re not arguing over a $1.00/bu malt premium.  We’re arguing over a 16 cent premium in 2-row and a 15 cent DISCOUNT in 6-row.

The malt barley market is not like domestic feed barley or canola.  Whereas buyers of those crops have street price bids practically every day, the malt industry wouldn’t be expected to do the same.  In other malt barley markets, maltsters contract for acreage/production early in the year to ensure supply.  There is no reason to believe that Canadian maltsters would act any differently in a voluntary CWB scenario.

At least one malt barley buyer in the US buys barley on a basis contract to spring wheat futures.  The logic is sound; the maltster is trying to “buy” acres and must compete with alternate crops.  In this case, its spring wheat.  They set a basis that makes malt barley attractive to farmers when compared with prospects for spring wheat.

If a farmer signs up malt barley on a basis contract, he can keep it unpriced until later or price it right away.  

In Western Canada, maltsters could price malt barley against competitive crops such as canola or wheat.  The maltster’s challenge would be to come up with a price that would attract contracted acres away from canola or wheat.

Maltsters will want to work with farmers to get the right varieties in the ground and they will want an assurance of supply.  Since the signals they will want to send will be around seeding time, they have a greater interest in being competitive with crops like canola and wheat. We all know how feed barley pencils out against the major crops in terms of per acre returns.  Putting their contract bids just pennies above feed barley as some fear, won't buy the acres the maltsters will need.

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