Oats Marks Quiet
It's been a quiet couple of weeks in the North American oats market. Since the drought last summer, no terribly bearish news has come forward to knock prices heavily lower but neither has there been any bullish demand news to drive a big rally.
The CBT oats futures are trending sideways in a tight range and the March and May futures are still not far off their winter highs. They’re holding up a lot better than many other markets.
Cash markets in Western Canada are flat as well, with some cases lower than in January. Old-crop bids for April/May delivery are generally in the neighbourhood of $3.00-3.30/bu in Saskatchewan and $3.30-3.50 in Alberta. A $4/bu bid from an Alberta miller, which was seen earlier this winter, is no longer posted.
A Somewhat Bearish Short-Term Outlook?
Talk has surfaced lately that milling oats supplies across North America are heavier than most had thought. Scandinavian exporters continue to offer high volumes of good quality oats for both nearby and deferred positions. Trading is light.
The idea that ample oats stocks are sitting in the U.S. Gulf and the St. Lawrence while spot markets are quiet seems bearish for the near-term. Much of the nearby demand for cash oats and the milled products appears to be filled, according to trade sources. Processors are said to be scaling back their buying plans accordingly, at least for the March/April timeframe. Farmers remain light sellers but buyers' requirements seem to be even less than what’s coming out.
So, while there remains the potential for a rally in the old-crop high-quality oats price, there’s no need for one right away. And over the long term, spot prices are likely to slip towards new-crop levels. Oats is an early-harvested crop in the U.S. and a return to normal yields and acreage abandonment rates in North America in 2003 will create ample supplies of oats by harvest, even if total seeded acreage declines.
The Mid-Term Outlook: Potential for a Rally?
Despite the rising bearish sentiment the market is holding on at current levels due to the ongoing reality of tight North American and world supplies.
World oats production in 2002-03 at 26.03 million tonnes (according to USDA) was down 3.3% from last year. Given normal consumption, this will draw this year’s carryout down by 13% to one of the lowest levels on record.
With the prices for most competing crops having rallied to offer incentives to grow crops other than oats, there’s a good chance North America will start out with a smaller acreage base in 2003. This could lead to higher old-crop markets very quickly if no moisture is seen. Buyers have shown a willingness to pay whatever it takes to pry what they need out of farmers’ hands in order to meet the steady demand for oat products.
The weather will be the biggest market factor. Despite the recent snowfall in parts of the Prairies conditions remain dry in Manitoba and northeastern Saskatchewan. Rising concerns about yields would translate directly into higher oat prices. Considering the tight old-crop supply situation the market could be very volatile.
Outlook for New Crop Hinges on Weather
Most advisory services are recommending producers begin forward contracting some new-crop production at today's prices because of the bearish potential for a return to normal weather. At around $2.00-2.40 across the Prairies, fall bids are certainly less exciting than spot markets, but in historic terms these levels are nothing to sneeze at.
Yet they’re way off spot markets, making the inverse an important factor to watch in forecasting old-crop price direction. In the absence of a weather scare, if end users find themselves with adequate supplies on offer over the next few months the spread between old and new-crop bids will have to close.
A return to normal weather conditions will raise total harvested acres even if plantings decline. Given normal yields and consumptive demand, there will be an increase in 2003-04 carryout stocks. Agriculture and Agri-Food Canada, therefore, is expecting prices to drop, by about a third from this year's levels. This forecast argues that a prudent level of pricing should be done on expected new-crop production but ignores the chance of another drought.
The dilemma is this: in the event that oats markets do take off for the third straight season, growers will want to have something to sell. But good weather will mean you should have already sold. The best marketing strategy might be one that commits heavily to neither outcome. Very few farmers use options to balance their marketing, but the Chicago market does have puts and calls to take a look at. |
