Cash oats disconnect from falling futures

CNS Canada — Oat futures at the Chicago Board of Trade may be trending lower, but any further losses in the futures will only cause basis levels in the Canadian countryside to widen further, as farmers are reluctant to sell below their targeted levels.

The delivery specs against CBOT oats futures are not milling quality, which limits the ability for end users to take delivery on the futures, said Ryan McKnight of Linear Grain at Carman, Man.

There are plenty of poorer-quality oats left in delivery warehouses that nobody wants to take, he added.

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If an end user could get milling-quality oats through delivery against the futures, McKnight said, basis levels would never get this high. However, the relaxed specs make the futures a “risky hedge,” causing companies such as Linear to trade most oats on a flat price basis.

Farmers are also “are taking a stand” and showing an unwillingness to sell under $2.75 per bushel in Saskatchewan and under $3 in Manitoba, said McKnight.

The futures, meanwhile, are trading right above US$2 per bushel. Prices in Chicago fell as low as US$1.75 per bushel in March.

While a return to those low levels is possible, McKnight said such a move would only cause the futures and cash markets to disconnect even more.

Statistics Canada releases updated acreage estimates on June 29, and oats area in the country will likely be down from the 2.97 million acres forecast earlier in the spring. Canadian farmers planted 3.34 million acres of oats in 2015.

“In our backyard, there is definitely lower oat production,” said McKnight of the southern Manitoba acreage.

Planted area was down even more in northern Saskatchewan, he added, which usually has a comparative advantage when it comes to growing oats.

Anecdotally, some farmers in Saskatchewan who would normally grow a section of oats may have only seeded a quarter or half section to the crop this year.

Prices of only $2-$2.50 per bushel in northern Saskatchewan over the past six months “just weren’t enough” to draw in the acres, according to McKnight.

While the smaller Canadian acreage and the potential for tightening supply/demand balance sheets may bode well for prices down the road, McKnight said it will be tough for oats to strengthen on their own given the large wheat and corn supplies overhanging the grain markets in general.

If oat prices don’t improve over the next year, he foresaw a supply crunch.

At that point, “if they want the acres, the cash price will need to strengthen compared to other cereals.”

— Phil Franz-Warkentin writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

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Phil Franz-Warkentin writes for MarketsFarm specializing in grain and commodity market reporting.

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