Eastern prairie farmers who signed forward sales contracts for this
year’s oats might be in for their third ugly beating.
Most buyers aren’t going to let growers walk away from their delivery
contracts, so if a farmer has a crop that doesn’t meet grade
specification, he’s going to have to go oat shopping.
And that’s not going to be fun for those who contracted their oats at a
price lower than today’s futures and cash prices, said Statcom oat
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analyst Randy Strychar.
“You’ll have to buy your way out of the contract,” said Strychar. “The
market is up from where I expect many signed the contract, so they’re
going to end up spending some money (to buy themselves out of their
obligation).”
Last December, Chicago oats futures were trading at $1.46 per bushel
before the winter price surge. Early this week, the September Chicago
contract price was $1.92. Cash prices have followed a similar path.
But Strychar said producers
shouldn’t panic. There isn’t the same potential for prices to
continually rise as occurred last year, so a producer short on oats can
look around for his best deal.
“The (supply) problem is not as severe as it was last year,” said
Strychar. “We’ve got grain all over the place.”
That should calm buyer fears and put some restraint on prices. This
year, Scandinavian production is up about 400,000 tonnes and eastern
prairie production is up about 600,000 tonnes, he said.
“There’s less pressure around to push the market higher than it was
last year,” said Strychar.
Buying a local farmer’s crop may be better than simply settling the
obligation through the elevator.
“They may be able to buy it cheaper from a neighbour. If you go to a
line company now, my guess is you’re going to pay that spread,” between
the contracted price and present futures prices.
Forward sales contracts have become a major element of the oat growing
industry. They have offered security for buyers and growers and have
allowed the industry to grow and thrive.
But this is the third year in a row that many farmers will have trouble
meeting their obligations and will lose money. Strychar said it seems
bad now, but farmers need to have a long-term perspective.
“If you did it for 10 years, it would work for seven.
“Does forward contracting work well in a bad crop year with no carry?
No. It’s awful. It’s horrible. But seven out of 10 years they’re going
to make a good pile of money,” said Strychar.
“In the long run it works time and again for the farmer. He’s gotten
the returns, the exports, the production, all because of the forward
contracts.
“What we’ve run into is three years of bad crop production.”
