Oat rally inadequate to trigger more acres

It has taken a long time for oat prices to rise, but they did last week, finally reacting to the need to rebuild supply to safe levels.

However, with spring nearby and farmers in most areas having better options, will the trend of declining oat acreage stop this year?

“It doesn’t pay out. If we don’t have $3.75 to $4 (cash) oats, it doesn’t pay,” said eastern Manitoba Agri-Trend Marketing adviser Brian Voth.

“When I started this job, I had eight or 10 guys growing oats. Now I have two.”

Voth said farmers in Manitoba’s Red River Valley have better profit prospects with corn, and those further west will probably do better with spring wheat. So why grow oats?

That’s been a problem bedeviling the prairie oat industry, squeezing out oat acreage as farmers embrace other crops.

However, neither futures nor cash prices have reacted, until the past week, to make farmers want to grow the once-mainstay eastern prairie crop, even though stocks are low and acreage is declining.

Oat futures rose last week after Statistics Canada found less of the crop in store Dec. 31 than traders and industry expected.

Stocks were 1.87 million tonnes, down from 2.33 million the previous year.

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However, analysts said the rally was not sufficient to convince many farmers to grow the crop.

Chicago March oat futures were $3.83 per bushel Feb. 11, with May oats at $3.74, a rise of about 20 cents per bu. following the report.

December 2013 oat futures traded at $3.70 the same morning, only a few cents higher than what the price was before the Statistics Canada report.

The rise in old crop months helps improve the relative competitiveness of oats to other crops, although not by much, and won’t be enough to turn around acreage, said Oatinsight.com analyst Randy Strychar.

“Plantings are at the moment forecast down five to 15 percent,” he wrote in his Feb. 10 weekly oat commentary. “While cash oat prices have recently gained on barley and wheat, the gap is still too wide versus wheat to forecast steady to higher oat plantings this spring.”

It is a vexing situation for Strychar, who has been bullish about the fundamental situation of oats for two years, noting the shrinking stockpile of milling oats.

However, futures and cash prices have failed to reflect the fundamentals, leading to declining acres at a time of shrinking supplies and steady demand. He is still bullish, but unsure of how the price will sort itself out to eventually reflect the tight stocks.

“The tightening North American oats supply outlook is making a strong case for a genuine oat bull market well into 2014, an oat market that is going to need to see higher oat values versus other crops to stem North American oat production and supply declines,” he wrote.

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Strychar said stronger oat prices since Statistics Canada’s stocks report has improved spreads versus wheat and corn but needs further improvement.

Average old crop prairie milling bids are $3.71 per bu., with $3.37 for new crop.

However, bids of $4 per bu. for old crop were seen at Viterra in Portage La Prairie, Man., and $3.56 for new crop. While old crop values rose more than 30 cents per bu. after the Statistics Canada report, new crop months were much less affected. Because new crop values are the biggest influence on spring planting decisions, most analysts think the rally will have limited impact.

Oat pricing has had many problems over the years. Many farmers used to contract large amounts of their expected production, but production failures left many short on their delivery obligations and on the wrong side of the market.

Chicago futures have become illiquid and subject to wild bursts of volatility. A cascading sell-off was seen in a dramatic incident last year as investment funds liquidated long positions and few were available on the other side to stem the decline.

In December, oat old crop futures fell to $3.30 from $4, following wheat but ignoring the underlying bullish situation for oats. That further undermined confidence of oat growers.

Voth said few farmers are excited by the prospects for oats this year. Those who want to grow it tend to be contrarians playing the “if nobody else grows it” line of thinking, farmers who like the crop because it stores for years or those who for agronomic reasons grow a particularly good crop of oats.

However, the failure of both cash and futures prices to reflect what is universally regarded as a bullish situation is stopping farmers wanting to grow the crop and will likely stop acreage from rebounding.

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“This oat market has had me stumped so many times in the last couple of years,” said Voth.