Farmers, oat buyers and grain companies have quietly developed a vibrant prairie cash market as they mostly abandoned the Chicago oats futures contract and its problems.
It’s a far different market than farmers had five years ago, but not necessarily a worse one.
“The cash does reflect the demand,” said Prairie Oat Growers Association president Art Enns.
“Cash is reflecting and has drawn acres.”
The cash market now comprises direct contracting from processors, small grain companies sourcing and shipping directly to U.S. buyers and a heavy reliance on producer cars and even truck traffic.
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Some big grain companies have backed away from oats to focus on the bigger acreage crops.
“You’ve seen a lot of the smaller grain handlers pick up the slack,” said Enns.
Massive spreads and unpredictable swings between oats futures prices and the actual price in either Minneapolis, the main processing region, or Western Canada, the main growing region, have frequently occured in recent years.
Grain companies and millers have often had to offer huge basis premiums over the futures to attract grain, encourage farmers to continue growing the crop and approximate the actual market value.
The Chicago contract has often swung widely from cash market values, but the situation became critical during the 2013-14 transportation crisis.
Grain shippers’ inability to access rail cars to move the crop to Minneapolis meant futures prices shot through the roof while cash market values on the Prairies collapsed. The futures prices accurately reflected a real cash market situation at the delivery point, but one totally irrelevant to western Canadian farmers.
Divergences have since oc-curred again, but in ways that have not reflected cash market situations.
Non-commercial traders have treated the oats contract as if it is mostly a cereal crop, causing trends in wheat and corn markets to dominate oat action, even though it doesn’t represent real oat demand.
“The funds and the (speculators), they’re just driving this market in the direction they want it to,” said Randy Strychar of Oat Information.
He said the contract continues to be a useful trading mechanism for non-commercial players but almost useless or even dangerous for farmers, grain handlers and processors.
“It doesn’t really reflect what conditions are going on in the cash market,” said Strychar.
The lack of a good futures hedge and low volumes of physical crop have discouraged some of the major grain handlers from showing much interest in moving the crop. It has created a busy market of producer cars and trucks being loaded by farmers and shipped by small grain handlers, Enns said.
Strychar said Quaker Oats helped drive the evolution by direct contracting with western Canadian farmers and having them load into producer cars.
Fifty percent of Canadian oat exports to the U.S. are now shipped in producer cars.
Enns said oat exports to Mexico have been healthy, and there have been sales to Asia.
Because of all this, oats have drifted into a specialized production and marketing realm. How that will affect spring acreage is hard to tell.
Strychar predicts a 10 percent acreage drop this spring, based mostly on poor new crop prices compared to Saskatchewan cash wheat prices. However, some traders are predicting up to a 25 percent drop.
Enns said serious oat growers won’t be bothered by the switch away from futures and basis prices. They know the buyers and how to get and assess a cash quote.
However, the lack of futures means some farmers might be less likely to throw in some acres, and some grain handlers might not be keen to deal with the crop.
