Oat prices may finally be on the road to recovery.
Futures prices had been low through most of the autumn, so farmers should take heart with the recent rise in the Chicago market, said Ag Commodity Research analyst Randy Strychar.
“We’ve got a tight market coming,” said Strychar, who is giving a market outlook speech to the Prairie Oat Growers Association annual meeting in Winnipeg this week.
“We’ve got some fundamental tightness and some good forward numbers. The futures market didn’t accurately reflect it until last week.”
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Oat prices have been lower in the Chicago pits than they should have been, Strychar said, because farmers were making few deliveries and grain companies were making few hedges.
“It was basically the funds and the speculators in the pit,” said Strychar.
“It was all technical. They are bouncing in and out on basically just technical trading signals.”
Almost 50 percent of the open interest in oats was held by technical traders recently, which is far higher than their usual 25 to 30 percent level, Strychar said.
While farmers and grain companies tend to focus on underlying supply and demand when trying to figure out crop prices, commodity funds and speculators focus on short-term dynamics like momentum. Because of this they can drag prices much lower or higher than real world conditions justify and this is one of those cases, Strychar said.
Futures prices were lower than they should have been.
Farmers didn’t suffer as much from this as they might have, Strychar said, because grain companies took on much of the pain by offering better basis levels than usual.
Grain companies often have to fill supply contracts, so if futures prices and a regular basis aren’t enough to pull in grain from farms, they’ll sweeten their basis levels until they get the grain they need to complete their obligations.
“The basis has been doing most of the work,” he said. “The commercials hate that.”
This worked in Saskatchewan, where oat deliveries are 70 percent ahead of where they were last year at this time, Strychar said.
But so far Alberta farmers, whom buyers are relying on to make up for Manitoba’s shortfall, haven’t picked up their pace.
“They’ll need to work over the winter to get Alberta oats,” he said.
Strychar said oats futures will fluctuate but by late winter prices could be stronger.
The recent uptick in futures prices may turn around soon after commercial buyers meet their immediate needs.
“My guess is they’re going to step away now. You’ll get an ebb and flow (in oat prices this winter),” he said.
Despite the fluctuation, the trend will move higher over the winter as the reality of the tight stocks of quality milling oats begins to figure more strongly in buyers’ minds, Strychar said.
“The seasonals tell me that February prices will go up. The front end of that started last week.”
Prices could move up another 10 to 30 cents per bushel.
