Contracts in inverse | Difficulty getting oats to users lifts futures, but prairie cash prices still lag behind
Chicago oat futures keep revealing the troubles in rail logistics shipping to the U.S..
This year’s futures prices are registering an inversion between nearby and further out months. That was often the case last year.
Last year also saw enormous spreads between prairie cash market prices and futures prices.
The inversion once more makes oat futures prices a poor standard against which to judge prairie cash prices, and is a clear indicator of the problem of getting rail cars full of oats to where they’re needed.
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“Essentially it’s a function of freight and the availability of freight,” said broker Austin Damiani of Frontier Futures in Minneapolis of the inversion.
Crop futures should usually have “carry,” or a slightly higher price in later futures month compared to the nearby contracts. The carry reflects the cost of storing the product.
However, oat futures are now inverted. As of Oct. 20 December was $3.50 per bushel, March $3.39, May $3.31 and July $3.24. The only break in the pattern is with September 2015, in which prices are three cents higher than July.
Oats are concentrated geographically, both in production and delivery, allowing this odd price phenomena to develop.
The futures price reflects a delivery point in the Minneapolis area so when there are problems shipping oats off the Prairies and shortages develop at Minneapolis the futures price rises.
But the shipping problems cause the cash price on the Prairies to fall.
Ken Ball of P.I.Financial said most futures contracts are almost never used to force delivery of physical crop, but it is not uncommon with oats.
There have been so many problems getting Canadian oats off the Prairies to U.S. buyers that some commercial users stand for delivery so that they can be guaranteed good quality.
This is intensified by the thinness of trade in further-out months, with most futures trade occurring in the nearby contract.
“Last year, every month just about would zoom up 20, 30, 40, 60, 80 cents (per bushel) going into delivery,” said Ball.
“We’ll probably see that all winter.”
Damiani said nearby futures reveal that traders know rail problems make it hard to get physical grain into the oat delivery zone. A big risk premium is built in to nearby prices.
However, traders aren’t willing to price that into winter months because the situation then is unknown.
“You do have an idea that it’s going to be hard to move a whole bunch of oats into delivery position (now) … but (with later months) you just don’t know, so you don’t have that same sort of risk premium.”
