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Strong Oat Prices Could Disappear Quickly

Despite what has been one of the most challenging years for oat growers in recent memory, the outlook for those farmers who were able to harvest a near-normal oat crop are positive, if not great. Serious seeding delays across much of the western Canadian cropping belt this past spring resulted in a significant loss of oat acreage. This was followed by untimely rains that hampered crop development and finally a rain-plagued harvest that reduced not only the size of the oat crop but resulted in reduced quality in many regions of Western Canada. The delayed seeding saw oat area fall from March 2010 projections of 3.9 million acres to just over 2.8 million acres, a new record low. This resulted in the second-smallest oat crop on record, surpassing declines seen in the drought years of 2001 and 2002.

All this mayhem across the Canadian Prairies has resulted in sharply higher oat prices. Cash milling oat prices at the benchmark Viterra Portage la Prairie, Man., mill have risen nearly 90 per cent or C$1.70 per bushel since June 1 and are trading nearly C$.50 per bushel about the five-year average. By contrast canola prices have risen only 12 per cent with non-board barley and wheat up 10 per cent each according to the latest StatsCan monthly Farm Product Prices. Flaxseed and canary seed prices have tried to keep pace with oats but are up only 41 per cent and 24 per cent respectively. That’s all good news for oat growers who harvested a decent oat crop this fall but what about demand, and what will drive oat prices going forward? Will there be markets for Canadian growers’ higher-priced oats?

From the demand side of the oat market the outlook is somewhat mixed, however there should be more than enough commercial demand to consume the bulk of oat supplies Canadian growers are holding this year, allowing farmers to take advantage of the above-average oat prices. Demand for milling-quality oats into food markets is expected to remain mostly steady in 2010-11, however sharp increases in oat prices relative to other feed grains has significantly reduced the demand for oats in U.S. horse markets. Canada exported a total of 1.40 MMT in 2009- 10. Horse markets consumed 0.300 MMT of this export with human consumption demand using the rest. Total exports are expected to drop to 1.25 MMT in 2010-11 with horse demand falling to 0.15 MMT and human consumption holding steady at 1.10 MMT. Even this reduced demand will barely be covered by the available Canadian oat supplies resulting in Canadian end stocks at July 31, 2011 of just over 0.450 MMT. If realized, this end stock would be near the record low of 0.338 MMT reached in the drought-impacted crop year of 2001-02. This is going to put a major focus on 2011 oat plantings.

THE FUND EFFECT

But supply and demand are not the only factors driving oat prices. Outside forces such as index fund trading of agricultural futures, global currencies and macroeconomic factors are all having a huge impact on oat futures and cash oat prices. Index funds have by far had the largest impact on oat prices.

The funds began to accumulate net long positions in a huge cross-section of agricultural commodities in 2006, including oats. The funds at one point in 2007 held nearly 40 per cent of total open interest in Chicago Board of Trade oat futures and options combined. This had an artificial but positive effect on oat prices, pushing oat futures to an all-time record high in June of 2008 of US$4.83 per bushel. The downside to the index funds was when the economic meltdown began in September 2008 the index funds began to aggressively liquidate their long positions in oat futures, eventually pulling oat futures down to US$1.99 per bushel in January 2009.

Index funds are not actual physical buyers or sellers of agricultural commodities they are, in most cases, speculators which again can have a positive and negative effect on oat prices. The funds have again accumulated a large net long position, and are now holding roughly 20 per cent of the CBOT oat futures and options open interest. This has again had a positive impact on oat prices, beyond supportive supply and demand factors, however any liquidation of the net long position could again have a large negative impact on oat prices.

Another factor impacting oat prices has been the Canadian dollar. The bulk of Canadian commercial oat sales are done in U.S. dollars. The rising Canadian dollar, sitting at or nearly at par with the U.S. dollar, has had a negative impact on oat prices. Each 100 basis point increase in the Canadian dollar results in a theoretical impact of 2-1/4 cents Canadian per bushel on cash oat prices at primary Canadian elevators. In a “buyers” market, such as we are currently looking at, this generally means a drop in the oat street price of 2-1/4 cents a bushel.

World economic factors such as interest rates and inflation concerns in China, debt problems in the U.S. and Europe are also impacting agricultural commodities, including oats. Ag futures markets are becoming increasingly sensitive to shifts in global macroeconomic factors. The oat market is no longer simply driven by oat or even agricultural supply and demand factors, but is in fact part of a huge integrated and very complex global economic network.

RandyStrycharispresidentofAgCommodity Research.Formoreinformationvisitwww. agcommodity.info

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