Report Highlights:

Total production of wheat, barley, oats and corn is forecast to fall 20 percent in 2014 to 52.0 million metric tons (MMT). High supplies and a weaker Canadian dollar, combined with strong world demand are forecast to keep exports above average levels in 2014/2015. Total production of wheat, barley, oats and corn in 2013 was 65.8 MMT, a 29% increase over 2012 production levels of 51.1 MMT. How much Canada will be able to leverage the high grain supplies and the weaker Canadian dollar during the 2013/2014 marketing year will depend on Canada’s grain handling and transportation system’s ability to get the grains to the ports and out to the export markets.

IN BRIEF:

2014/2015: The record breaking grains and oilseed crop in 2013 will have a carry-over effect into planting decisions for 2014/2015. Carry-over stocks that are significantly higher than average, strategic decisions on which crops will bring in the most revenue, and transportation costs will be critical factors in planting decisions. While it is still very early, Post forecasts total production of wheat, barley, oats and corn to fall 20% in 2014 to 52.0 million metric tons (MMT). High supplies and a weaker Canadian dollar, combined with strong world demand are forecast to keep exports above average levels in 2014/2015.

2013/2014: Total production of wheat, barley, oats and corn in 2013 was 65.8 MMT, a 29% increase over 2012 production levels of 51.1 MMT. The huge crop has put a strain on the grains handling and transportation system. A weaker than expected economic performance in 2013 compared with the United States and falling crude oil prices has weakened the Canadian dollar against the U.S. dollar. With most major banks forecasting the Canadian dollar in the 90 cents US range for 2014 and into 2015, this will help boost Canadian grain exports. How much Canada will be able to leverage the high grain supplies and the weaker Canadian dollar will depend on Canada’s grain handling and transportation system’s ability to get the grains to the ports and out to the export markets.

OUTLOOK:

WHEAT

2014/2015

In 2014/2015, POST forecasts area harvested to drop 12 percent and wheat yield levels to return to more average levels after the previous year’s bumper crop. Wheat production is forecast to fall to 27.0 MMT, a 27 percent drop from 2013/2014 levels. Supply is forecast to fall only by 10%, as high carry-in stocks will partially offset the anticipated decrease in production. Strong domestic supplies, lower world production, and continued strong demand for wheat are forecast to result in total wheat exports of 20,000 TMT. Domestic consumption of wheat will remain strong due to high supplies. Carry-out stocks are forecast to continue to remain well above average at 10.6 MMT.

2013/2014

The 2013/2014 growing season had a late start but ideal environmental conditions resulted in one of the largest wheat crops on record. Total supply is expected to increase by 28 percent and it is highly likely that as much as 6 million tons of wheat will not make it to market this year because of supply chain constraints. While stocks typically are approximately 15 percent of supply, in 2013/2014, stocks are expected to grow to levels not seen in more than 20 years and are forecast to increase from 5 to more than 11 million tons. Strong world demand, strong supplies, and a weaker Canadian dollar will boost exports in 2013/2014.

Due to the large crop, the pace of wheat grain exports is 16 percent ahead of last year’s pace for the same time period, and 27 percent ahead of the five year average. Based on five year averages, for wheat grain, by this time of the year approximately 33 percent of the crop will have been exported. Therefore, should the trend hold, wheat grain exports are expect to reach record level of 22.0 MMT.

The pace of wheat products for the same time period is also significantly above the previous year (11 percent), but is also significantly below the 5 year average (9 percent below). Exports of wheat products have been trending downwards for the past 10 years. This is largely due to a reduction in processing in Canada. Exports are likely to reach 252 TMT, slightly higher from the previous year’s level of 249 TMT, but still below the five year average of 275 TMT.

Total wheat exports (products plus grain) are expected to reach a record level 22.2 MMT, 17 percent above the previous year’s levels. This represents record export levels. Export demand may be tempered by slightly by higher world supplies (increased competition), as well as the strain on the Canadian grains transportation system to get the wheat to export markets.

BARLEY

2014/2015

Extremely high barley carry-over stocks, combined with an anticipated return to normal yields is forecast to result in a drop of barley production for 2014/2015. Barley production for 2014/2015 is expected to be close to 8.7 MMT, a 15 percent decrease from 2013/2014 levels. Supply is only forecast to fall by about 2 percent as high carry-over stock nearly offset the decrease in production.

Exports are forecast to reach 1.450 MMT, a slight decrease from 2013/2014 expected exports. Domestic demand for feed use will remain steady as the cow herd size in Canada remains stable as the industry continues to consolidate. Stocks in 2014/215 will be drawn down as due to lower production.

2013/2014

Ideal growing conditions in 2013/2014 resulted in a 28 percent jump in barley production compared to the previous year. The quantity of high quality malt quality barley produced this year is also very high, more than 1.5 times the average. Malt barley typically accounts for a small percentage of production.

Only about 15 percent of the barley supply is exported on average. Limited rail south to the United States, combined with rail congestion to get to the ports has resulted in the pace of barley exports being the slowest in five years. The pace of barley exports are 11 percent below the five year average and down 30 percent from the previous year. As bottlenecks unblock, the barley crop will move forward and is estimated to reach 1.52 MMT by the end of the marketing year. Exports for feed barley to the U.S. for feed is limited due to a very large U.S. corn crop, but also due the limited rail available to move it south. Demand for Canadian malt barley by the United States is also tempered by the fact that the United States also had a good sized malting barley crop in 2013.

Domestic demand for barley for feed purposes is expected to increase slightly as it replaces feed wheat as the cheaper feed option. Despite cheap feed costs, and high cattle prices, Canadian herd sizes are not growing and are in a state of consolidation while farmers decide how to operate in an uncertain environment. As a result, while the availability of cheaper feed has grown 25 percent, demand will likely only increase 5 percent. The oversupply of quality malting barley means that the premiums usually associated with high quality malt barley are coming under pressure. Producers are faced with the decision to sell now or to store the barley until prices improve in the next year. Stocks will increase as the exports and domestic consumption are not high enough to offset the high production levels.

OATS

2014/2015

Despite high oat production in 2013 (3.9 TMT, an increase of 38 percent from 2012/2013 levels due to ideal growing conditions), and current high oats prices driven by logistically constraints cause by the large 2013/2014 crop, the general trend has been for decreasing acreage in Canada going to oats. The main reasons are new crops and shorter rotations are more lucrative and attractive, as well as demand for oats for the horse feed market has shrunk considerable since the North American economy has slowed down. Canada has been working on increasing the attractiveness of oats by putting more money into research, trying to find new food uses, and also conducting trade missions to Mexico to help convince Mexico to become a more consistent purchaser of Canadian oats. The United States remain the number one importer of Canadian oats. For 2014/2015, while area harvest is forecast to increase slightly, production is forecast to fall 14 percent due to a return to average yields. High carry-over stocks will offset the fall in production resulting in an increase of supplies of 3 percent. A weaker Canadian dollar compared to the American dollar, and higher than average supplies is expected to continue to support oats exports at levels similar to those expected for 2013/2014. Domestic usage is forecast to remain steady as the Canadian herd size remains stable. Carry-out stocks are expected to remain level.

2013/2014

A lower than average oat supply in the United States that is being aggravated by congestion on the rails moving south from Canada has resulted in strong prices for oats. As a result of the congested rail system and strong demand from the U.S. industry, industry is reporting that more trucks carrying oats for deliveries to companies are going down the United States. Despite higher than expected production in 2013, the pace of oats exports are 25 percent below the pace of the previous year for the same time period. Approximately 95 percent of its Canadian oats exports go to the United States, while Japan accounts for approximately 2 percent. Stocks will grow significantly in 2013/2014 and are expected to reach 1,164 TMT.

CORN

2014/2015

A return to normal yields, and a slight drop in area seeded to corn due to lower corn prices and high carry-over stocks is anticipated in 2014/2015. Corn production is forecast to decrease 12 percent to 12,900 TMT which is still above the five year average. Corm production has been on an increasing trend due to high corn prices and an emerging domestic ethanol industry. High domestic stocks will continue to limit U.S. corn imports. A weaker Canadian dollar and high domestic supplies will keep corn exports above the five year average. Corn exports in 2014/2015 are forecast to remain close to 2013/2014 levels of 1000 TMT. While lower corn prices will increase domestic consumption for feed use, stocks are forecast to remain stable as high supplies will offset the increases in feed usage.

2013/2014

Crop year 2013/2014 will see higher than average corn supplies in Canada due to higher than average yields. High corn supplies, well above the 5 year average, are expected to limit the demand for corn imports. Canada’s export opportunities in 2013/2014, despite a weaker Canadian dollar and high supplies export opportunities will be limited due to the large U.S. corn crop. While exports are expected to fall 43 percent from the previous year’s level, at an estimated 1.0 MMT, corn exports will still be above the 5 year average of 890 TMT. Feed usage is expected to increase due to lower prices; however this increase will be limited due to the fact that the livestock herd size in Canada is not showing signs of growing and is instead in a period consolidation. Carry-out stocks will be significantly higher than average.

POLICY:

Highlight on the Grain Handling System: The struggle of the Canadian grain handling and transportation system to manage the large crop has dominated the farm news. The consequences of not getting the crop out to its export markets in time are significant – contract penalties, lost sales, demurrage costs and reduced grain prices for farmers. Timing is also critical. Producers are hoping to get a significant portion of the crop exported before the southern hemisphere crop begins to be harvested, after which Canada begins to get a logistic disadvantage due to distance to markets.

There are several elements to the grain handling system that are causing bottle necks. First, the sheer size of the crop has grain storage capacity in Canada stretched to its limit. Based on industry data, country stock positions are at capacity (approximately 92% to allow for segregation), and primary stocks are 25 percent higher than the same time as last year. There is significant congestion at the country elevators and several grain companies have stopped accepting non-contracted deliveries of grains and oilseeds for the rest of the crop year. Even farmers with delivery contracts are being told to hold off on deliveries until the rail cars can be found. Wheat is the most challenging commodity with many buyers telling sellers that un-contracted grain has little chance of moving. There has some anecdotal information circulated about farmers by-passing Canadian elevators and driving south to U.S. elevators where there are more attractive prices. Post has found no evidence that this is a significant trend as only in some cases would the price differential cover shipping costs. The increase in trucking volumes would only be a reflection of the larger crop size. Nevertheless, transportation logistics will play a critical role in determining the shape of the flow of grains between Canada and the United States as the rail issues are worked out.

Demand for railcars is outstripping supply, and grain companies have expressed frustration with the ability of Canada’s major railroads, Canadian National (CN) and Canadian Pacific (CP), to manage the demand. CN and CP claim to be providing cars above the 5 year average. Industry is reporting that dwell times for loaded cars at country elevators are as high as 11 days which causes logistical issues with the following week’s allocation. Statistics suggest that total unloads at Vancouver remain essentially on par with the previous year’s count. Overall tonnage is increased however, because of the higher average weight per car loaded in the country. Cold weather may also be a factor slowing rail transportation as the companies put few cars on when it is cold. The terminals on the West Coast (Vancouver and Prince Rupert), which account for about 40% of storage capacity in Canada, as of week 24, show stocks to be nearly a quarter below the previous year’s level for the same time period and industry statistics also suggest that the number of ships waiting in line at port is higher than average. Experts estimate the total vessel demurrage paid in the 2013/2014 crop year at over 20 million Canadian dollars. Industry statistics also show that there is a reduction in exports going through the seaway (through Thunderbay). Since Western Canadian grain moving west of Thunderbay is subject to a revenue cap, the seaway route is less attractive and companies seek to arbitrage transportation costs (different areas may be charged higher rates than others).

While everyone seems to agree that better coordination of grain movement is a priority, there seems to be no clear path forward. One of the concerns with the dissolution of the CWB single-desk was that the level of influence grains would have over the railways would diminish. There have been numerous reports that grains are being displaced by other more, higher revenue-generating commodities. These concerns arise due to the revenue cap on what railways can charge for moving Western Canadian grains. The amount of money that railways can earn from the movement of western grains are determined by the Canadian Transportation Agency and any revenues above the cap must be repaid by the rail companies and used to fund research in grains activities. The key factor in determining the cap is the VRCPI or the volume related composite price index, so the more grain transported, the more revenue is generated by the railroads. There is increased competition on the rails, however, the carload reports on the CN and CP company websites suggest that grain shipping in 2013/2014 (as of January 19th) is on par with grain shipping levels in 2012/2013 for the same time period.

Level of service is not a new complaint for grain companies. Legislation was passed in December 2012 (the Fair Rail Freight Service Act) to try to hold rail companies more accountable for delays. Shippers viewed this legislation as ineffective as the legislation did not include shipper amendments which would have meant greater penalties for the railways when they failed to live up to their service obligations. Canada’s Minister of Agriculture, Minister Gerry Ritz, recently made a funding announcement of 1.5 million dollars to a research product to improve supply chain efficiency and reliability. This announcement was not met with much enthusiasm as many believe that the problems have already been identified and implementing the solutions need to be the priority.

Grain companies in Canada have put an emphasis on rationalizing their assets, on increasing throughput at their facilities, as well as increasing storage capacity and elevator and terminals in order to increase their efficiencies. There are many in the grains industry that feel that the rail companies must also invest more into improving efficiencies and reducing wait times. With a paradigm shift that has farmers growing increasingly bigger crops, all players in the grain handling system in Canada are going to have to make the necessary adjustments to remain competitive.

Additional Infrastructure Development: The Canadian Wheat Board also made a significant announcement in late November. CWB president Ian White announced that the CWB will buy Mission terminal in Thunder Bay, Les Elevateurs des Trois Rivieres and Services Maritimes Laviolette in Quebec, as well as car loading facilities in Manitoba and Saskatchewan. This is an important change for the CWB as it will no longer be completely dependent on competing grain companies to export the grain. These eastern based assets will also make the CWB a serious player in east-ward crop exports. The move is not without some controversy as some Western grains farmers felt that the farmers should have had a say on the deal