Oat analyst Randy Strychar warned a couple of years ago that the oat market was on the verge of toppling into a cash market with contract production.
He’s almost ready to declare that the toppling has occurred.
“We are heading for contracting, and I don’t think you can stop it,” said Strychar, who had been hoping futures-based pricing could continue and save oats from becoming a specialty crop.
Unfortunately, Chicago oat futures have become so rife with pricing aberrations that most farmers and many commercial users will no longer use them.
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“We’re in the death throes of the oat contract. We’re just waiting for the burial,” said Strychar.
“Oats is not working.”
He said most oat growers are already living in a cash price world, and many commercial users have been burned too many times by futures to rely on the Chicago contract for their own hedging.
The transportation crisis of two years ago caused Chicago oat futures prices to soar at the same time that prairie oat cash prices were plunging. This often caught hedged farmers and processors in a brutal squeeze that forced them to buy their way out. For many, it ended up being the opposite of a hedge.
Oat futures have been weak re-cently, even though supply and demand is tight, which has caused another aberration from normal futures market expectations.
“The funds have been squatting on the oat futures, in a market where we have a very tight S and D (supply and demand), poor returns. That’s sending an incorrect signal to the marketplace,” said Strychar.
Much of the commercial industry has already shifted to cash prices with no reference to a futures value, he added.
Wild Oats Grain Markets Advisory newsletter publisher John Duvenaud said the cash market seems to be working fine for most growers and millers. A Chicago futures market doesn’t mean much when the real marketplace is at prairie driveways.
“The Manitoba oat price is a far more valid indicator of the value of oats than Chicago futures,” said Duvenaud. “Look at what Emerson Milling is paying.”
He said he had no trouble finding prices and buyers when marketing his own oats last summer.
“I had four interested buyers. They all put in a bid for me,” he said.
“I think you can sell uncontracted oats quite easily.”
Contract production has become more common in the western Canadian oat industry, but it is far from dominant.
However, Strychar thinks it will become more important as the industry evolves, with premium buyers wanting specific varieties.
“What’s coming is proprietary varieties and direct contracting.”
That means farmers who want to see premium oats at a premium price might need to sign a contract with a company that owns the rights to certain varieties.
Farmers who don’t want to sign a contract won’t get access to the variety and won’t have that company as an interested buyer after harvest.
Strychar said it’s fortunate that farmers have aggressively developed direct connections with processors, cutting out traditional parts of the market.
They are often using a broker to get a few dozen local growers organized, making a deal with a processor, then loading rail cars along a short line and shipping their oats directly to the buyer.
“This is almost like the birth of the co-op movement all over again.”
