It’s an old tool that’s bent and scratched up, worn from long use and much weaker than when it was new and sound.
However, many analysts say the Chicago oat futures contract is still a usable tool for hedging farmers’ oat prices, even if it feels like it might soon break.
That’s good news for those who believe in open market, publicly visible prices and the idea of price transparency.
However, it’s going to become tougher to get farmers to use oat futures if they continue to suffer the sort of gut-wrenching volatility — in often nonsensical ways — that has afflicted the contract in recent years.
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The U.S. Department of Agriculture’s recent supply and demand report hammered down oat futures, giving the contract a couple of limit-down days, even though cash market prices barely budged.
The barely budging bit makes sense because oats are in short supply and will probably be in even shorter supply next year. The futures sell-off was mostly due to investment funds bailing out of oat futures as fast as they were bailing out of corn futures.
The leaping away from corn made sense because the USDA found more old crop corn stocks than anyone expected, suggesting demand has slumped.
That certainly weakens the outlook for corn, and because oats roughly track corn, it makes sense that oat futures would weaken, too.
Oats are already priced at a premium to corn relative to their usual relationship, so weakness in corn was likely to draw down oat prices somewhat.
However, the size of the sell-off — a cataclysmic short-term slump — was all about the funds bailing, a number of analysts told me. The funds’ share of positions is never completely dominant in gigantic commodities such as corn, but in oats it can completely dominate trade. The funds recently had 25 percent of open interest.
Prices can slump when they all bail, and that’s the main story with what happened to oat prices post-USDA.
A similar event happened a year ago, when the funds for their mysterious reasons decided to bail on oats.
Funds started to sell, triggering other funds to sell and it became a cascade of slumping oat futures prices. Nothing fundamentally had changed, but farmers with oat futures positions witnessed a massive sell-off and a wild dose of volatility, something that doesn’t do much to instill confidence.
All that might make a farmer think oat futures are too dangerous to use to hedge new crop prices, but analysts told me they don’t think that’s correct.
True, oat futures can show wild gyrations and go on stomach-churning rides in the short term, but over the long term, they appear to be a good measure of future crop prices, especially new crop prices.
A look at the charts seems to bear that out.
There are sometimes wide deviations between corn and oats in the short term, but oats futures contracts track corn pretty well over the course of a year.
And some deviation should happen because oats aren’t corn and both supply and demand factors in the oat market don’t always reflect what’s going on with corn supply and demand.
Most farmers are flat-price oat sellers. They don’t bother with futures anyway. They just want to know what they’re going to be paid and base their budgets on that.
However, for those who want to use futures as a hedge for oat prices, the good news is that the old, scraped, bent and weakened oat futures contract still seems to work.
And while it does, all of us who watch the market can see a public price for oats and accept that there is some real world basis for the prices farmers are offered.
