Log-jam in grain movement has created a sweet spot for long oats

Frustrated oat buyers have been bidding up prices on old oat reserves 
as new oat supplies must wait in line in the grain-movement network

Reuters / Oat futures have been on a tear lately, jumping more than 20 cents a bushel, or 6.6 per cent, since the start of the month on concerns logistical log-jams will stall the movement of new oat supplies for several weeks.

That’s seen many traders putting on a long oats versus short Chicago wheat spread that is expected to press aggressively higher in the weeks ahead.

The price rally has flown in the face of market expectations as supplies of the crop are actually peaking right now, thanks to the advancing harvest across the northern U.S. and Canadian Prairies.

But even as oat inventories rise, buyers are having a tough time gaining access to them, thanks to a North American agriculture logistics system that is currently working at full capacity during a bin-busting harvest. Moreover, corn, soybeans and wheat typically get preference at rail, truck and storage depots, and forcing crops such as oats, sorghum and canola to wait in line.

And it turns out that traders expect the wait for oat shipments to extend into the winter, given that it may take several more weeks to clear the pipeline of primary crops.

For oat consumers, which include feedlots, millers and exporters, this logistical gridlock is a cause for frustration as they are forced to offer higher prices to growers and grain handlers for access to any old oat reserves as they try to keep their own supply pipeline flowing.

But for futures traders, the supply standstill offers an opportunity to establish a long grain market position at a time when harvest progress typically makes most market participants favour the short side.

It also provides small traders with a chance to put on positions contrary to what large speculators and managed money traders have been bracing for, as both those trader groups are with net short or holding only very modest long exposure in oats. As the delayed shipments of oats start to bite, those speculative traders are expected to add further lift to oat values by either buying back their short positions or adding to long exposure.

Two-sided affair

As the main driver of oat market strength is largely superficial and temporary, few traders are merely piling up long oat market exposure.

Rather, they favour matching any long stances in oats with a short position in other grain markets that are expected to see supplies swell at a faster pace than oats over the coming month or so.

The most popular short leg in this strategy is Chicago winter wheat, which is on the verge of its 2013 planting season and is projected to see a substantial climb in production versus a year ago, thanks to much-improved field conditions in top growing areas.

U.S. wheat prices are also viewed as relatively expensive currently, especially as North American wheat supplies are expected to swell considerably in the coming weeks as the U.S. spring wheat harvest wraps up and as Canadian growers gather what is potentially the largest wheat crop in that country’s history amidst worries of a rail strike.

But in time, the strike threat is expected to be alleviated, and those wheat supplies are expected to flow, which should start to apply pressure to wheat prices in the process.

This likelihood of a slide in wheat values offers traders with a chance to gain on both sides of the long oats, short wheat spread, and is why so many participants have happily piled in to that strategy in recent sessions.

It is also a reason why oats could be one of the top markets to watch over the coming months, and not a mere flash in the pan.

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