Wednesday, December 22, 2010

The Single Desk is Impotent in Barley

The latest PROs came out last week and in my view, the barley PROs tell an unfortunate and discouraging story.

The 2 Row malt PRO was lowered by $1.00 while the feed barley pool B was raised by $3.00.  This goes counter to everything we’re reading about the global malt barley markets.  With the poor quality crop in Canada as well as around the world, the malt premium (over feed price) everywhere else is getting larger – not smaller.  For example, I read recently that in Australia, the malt premium is now sitting at $100 over feed, double its traditional level.  Here in Canada, the spread between the CWB malt PRO and the CWB feed PRO is now at $27 after starting the year at $58.  The malt pool return is going the wrong way.

Here’s the problem. 

The CWB has already sold a fair amount of malt barley for this year.  And, if you’ve been following the market at all, you will know that the CWB would have sold this tonnage at prices considerably lower than what could be sold today.

Add to that the problem of the crop quality; with the lousy crop this year I’ve heard that there is little more than 700,000 tonnes selected for malt this year, and the CWB does not expect more.  Compare that to a typical year of around 2 million tonnes.

So the CWB has sold early and there’s little if anything left to sell at higher prices.  In fact, prospects look so bad that there will likely be imports of malt barley into Canada.

The malt PRO is dropping because in earlier PROs the CWB would have factored in expected higher prices to be sold later in the year; now that it’s apparent that they won’t get the barley for these higher priced sales, the PRO needs to be adjusted downward.  I expect it to drop even more by the end of the year.

Now complicate this with rising domestic feed barley prices.  The current malt premium will erode further if the feed prices continue to rise making it even more difficult to find additional malt barley.

Let’s look at a little history.

In 08-09, the CWB closed the malt pool to any new selections in Jan 2009 – the market price was dropping and the CWB wanted to keep new sales from eroding the pool return.  All selections after that point were only offered through Cash Plus contracts, at much lower prices than the pool.  Even though it provided lower prices to farmers, CashPlus became the only game in town.

Now, in 10-11, the CWB reported in December: “Going forward, there will be a limited volume of 2010-11 malting barley left to market”.  The CWB is sold out and the pool is practically done.  Unlike 08-09, the market price is soaring.   A CWB official confirmed that there are no CashPlus contracts being offered right now – but if they were, the price would be substantially above both the feed barley price and the malt PRO.

This time, the only game in town is the lower-priced pool.   But with bullish feed barley prices and outlooks, and the knowledge that malt prices should be higher, many farmers are likely to opt to sell their barley as domestic feed, effectively starving the pool.

The fact that the CWB is not offering CashPlus contracts tells us a lot about what drivers the CWB is following.  CashPlus would not only provide farmers with good prices and signals, it would also make the PRO look lousy.  And, if the CWB is short (committed more malt barley than what they’ve been able to select) they will want to make sure any more malt barley that is found covers the CWB’s commitments through the pool – even if it is at a lower price.  

If there was ever a year that farmers need good price signals, it’s this year.  There is a shortage of good malt barley and providing market prices would be instrumental in finding any additional stocks that are out on the farm.  From the farmer’s perspective, it would be valuable to know what his barley is truly worth before dumping it in the feed bin.  Unfortunately, from the CWB’s perspective, the best thing is to mute real prices.

Let’s face it – pooling barley in Western Canada simply does not work. 

Every year, the CWB struggles to compete with the domestic feed market on feed barley.  Some years – like this one – the CWB’s malt pool price struggles to compete with a rising feed barley market.  In fact, the way the CWB executed its feed barley export program kept domestic feed barley prices down, and, whether intentional or not, kept feed barley prices from threatening the malt pool.

And now, it’s clear that the CWB can’t afford to offer CashPlus because it needs to protect the failing pool.

The CWB can no longer assume it will obtain the barley it has sold.  Because of this and other challenges such as opposing market forces, the CWB is forced to act to protect itself and manage its risk in the malt barley pool account at a considerable expense to producers.  The barley producer loses in both price and opportunity.   We saw it earlier this year in feed barley, now we’re getting it in spades in malt barley.

It’s time for the new CWB board of directors to face the reality that pooling and the single desk don’t work for barley.  The board needs to go to the Federal Government to demand a change in the CWB Act to free barley from the single desk.  If that means to have barley farmers vote in a plebiscite, then do it.

1 comment:

  1. maybe the CWB should wait until they get there malt barley in the bin like the rest of us before selling it. Very poor management for all involved; Check out the "The Contingency Fund" on oct 6 2010 in blog archive. My kids could handle money better than the CWB: these guys need to be paid on performance or not get paid period.