Oat futures disconnected from crop’s cash value

Oat futures are entertaining to watch but reveal little about the current value of the crop, say some traders.

“It’s become less relevant over time,” said Paterson Grain oat trader Lorne Boundy, following recent futures market sessions that saw wild gyrations in oat prices.

“What’s an oat really worth?”

Chicago oat futures are thinly traded with only a few active players and many commercial users choosing instead to self-hedge through contracted production and sales.

With low liquidity, a few buy or sell orders can have an outsized effect on futures prices. For commercial users, including farmers, that can be a worry because a hedge or price discovering mechanism is only worthwhile if it accurately reflects the underlying cash value of a commodity.

But for others, having a wildly volatile futures contract might be an attraction.

“It’s not really an oats futures market. That’s just a name they give it,” said Ken Ball, a broker with P.I. Financial. “There are a half-dozen players who love to play oats … and they love to zing it around at their leisure. They can move it 20, 30, 40 cents that has nothing to do with oats.”

Some like to use oats for spread trading between oats and other grains, such as wheat or corn.

Boundy said it’s often hard to tell how closely the oat futures market is following the oat cash market, because even the oat cash market is becoming an opaque place.

“The oats market is getting more and more clouded for what the value of an oat is,” said Boundy.

“More millers want a specific product rather than a generic one.”

A growing percentage of oats are now grown under contract with millers. Often those contracts dictate what variety of oats must be grown and how they must be grown.

That means those oats are mostly removed from the cash and futures markets, leaving a shrinking crop to be priced by cash market buyers and less of a crop to be hedged by users.

“It’s less relevant over time,” said Boundy about the Chicago contract.

The traders said the recent volatility isn’t necessarily a sign that people are trading the contract divorced from crop fundamentals. It is possible that somebody chose to go long or short in a significant way because of hopes or fears about the crop in Canada or the United States.

Whatever the reason, the recent gyrations demonstrate how easily the oat futures market can be moved when players become active.

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