Current oat prices that are in the top 25 percent of their long-term range are likely not high enough to maintain acreage next spring, says an oat market analyst.
Randy Strychar of Ag Commodity Research expects oat acreage on the Prairies will decline by seven percent in 2013 because many other crops are more profitable to grow.
“Net returns (per acre), doesn’t matter what you look at, oats are near last on everyone of them. If you are looking at the major grains and oilseeds, they are probably second from the bottom,” Strychar told farmers at the Prairie Oat Growers Association meeting.
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“New crop oat values are running at 50 percent of wheat values. You’ve got about $8.25 (per bushel) in Manitoba on new crop on wheat. You’ve got oat values right now running around $3.75.… That is definitely not supportive of oat acres next spring.”
Strychar said it is hard to understand why prices have not rallied further, given the forecast of exceptionally tight year end stocks.
Statistics Canada’s November production report last week pegged oat production at 2.684 million tonnes, down 15 percent from the previous year.
Strychar sees oat stocks falling to 626,000 tonnes by the end of 2012-13 for a stocks-to-use ratio of 15 percent.
However, millers are not desperate despite tight supply, which is the main limit on prices.
“Growers in Western Canada are giving millers just enough oats to keep them satisfied,” he said. “Millers have been incredibly patient buyers.”
He believes oat prices might edge a little higher during the winter, which would be a good time to sell. However, he warned against waiting too long.
“Don’t lose sight of old crop marketing opportunities. There is a tendency to say, ‘well, prices are up here and are going to stay here,’ ” he said.
“But I can’t stress this enough. They are historically high prices. We are not going to stay parked up here unless we have consistently bullish news, and that is going to come from the weather.”
Looking at the current and forecasted tight supply and demand situation leads to a bullish assumption of stronger oat prices, or at least stronger relative to competing crops.
Strychar has penciled in 2013-14 production at 2.389 million tonnes, which would be the lowest since 1990.
Based on his demand assumptions for the coming year, he sees stocks falling to 410,000 tonnes by the end of 2013-14, give or take 50,000 tonnes.
However, there is risk in assuming today’s high grain and oilseed prices will continue. There is much instability in the global economy: the U.S. fiscal cliff, debt problems in the European Union and China’s slowing economy.
Investors are nervous and a crisis in any of these situations could shake confidence and push prices lower across all markets.
Weather will also play a role.
There has been a string of weather problems for the past year, from winterkill and spring drought in Russia to an historic drought in the U.S. Midwest to excessive rain recently in Argentina.
However, all crop prices would be pressured lower if weather in critical growing regions shifted toward a more benign trend.
“I can’t reiterate this enough,” Strychar said.
“Prices this high make buyers and speculators nervous. The first opportunity to see decent weather in the northern hemisphere, I can just about guarantee you are going to see this market easing if not starting to — you have to use the word plunging carefully — but they are going to start to move lower.”
He thinks U.S. corn production will jump higher next year, leading to lower prices that would also pressure oats.
However, he said he can’t ignore the fact that there is a wide divergence in corn price forecasts, with some analysts expecting prices of $8 per bu. or more by next summer.
Oats would likely be $3.80-$4 per bu. if corn reached $8 and reach $5.50 if weather scares pushed corn to $8-$10.
“That is just a stunning number. I can’t fathom that happening,” Strychar said. “You’d have to have just week after week after week of bullish (weather) news for that to happen.”
