WINNIPEG (Reuters) – North American oat stocks look to fall to a near-record low next year, tightening milling supplies even as food companies struggle to contain input costs.
High commodity prices for corn, sugar and cocoa have for the past year left food companies facing the dilemma of whether to absorb the costs or pass them to consumers.
However, the outlook for thin oat supplies in 2012-13 and the predictable bounce in prices is due to how relatively cheap the grain is now.
Oat prices have tumbled about 18 percent this year and look to strain supplies in two ways.
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Their low cost may increase demand from the U.S. horse-feeding industry, which is already eager to avoid paying a hefty premium for corn, said oat industry analyst Randy Strychar of Oatinsight.com.
Oats have also lost price ground to canola and wheat, the two biggest Canadian crops, and may fall out of favour with farmers deciding in early 2012 what they will plant, he said.
“It doesn’t look good for oats next year,” Strychar said.
Canada is the world’s biggest oat exporter, shipping nearly two million tonnes annually to make cereals, oatmeal and granola bars.
Millers have covered their supply needs through 2011, but next year looks worrisome, said Terry Tyson, grain procurement manager for Grain Millers Inc., which operates Canadian and U.S. oat mills.
“In the back of your mind, you’re thinking, ‘it’s going to tighten up,’ “ Tyson said from Yorkton, Sask.
“That is exactly what we worry about, that (farmers) aren’t going to have the incentive to plant.”
It will not take long for millers and the U.S. horse-feeding industry to chew through supplies after Canadian farmers harvested a third straight small crop this fall.
However, with millers well stocked for now, oats fell to the biggest discount versus corn in at least three years in late August, before corn prices weakened and narrowed the gap to $2.80 US per bushel over oats.
Strychar expects North American ending stocks next summer to fall to 1.419 million tonnes, the smallest in five years. Canadian stocks are seen tumbling to 750,000 tonnes, according to Agriculture Canada.
Cash and futures prices have not yet risen to reflect next year’s supply worries, but thin stocks would eventually increase prices, Tyson said.
“If higher prices persist, then prices on the shelf go up.”
General Mills raised breakfast cereal prices last November, and food companies have kept a close eye on rising commodity costs, said Erin Lash, an analyst at Morningstar Inc. in Chicago.
Food companies hedge costs and buy much of their inputs through forward purchases, blunting some of the impact when prices rise.
But at some point, food companies recoup higher costs by raising retail prices, trimming expenses or reducing how much product goes into a package, Lash said.
“They have several weapons in their arsenal when it comes to offsetting commodity costs. ”
Commodity prices have eased on jitters about the global economy, but it is unclear whether that trend will last long enough to ease costs for food companies, Lash said.
Much depends on how large a crop western Canadian farmers plant next year, and there’s a new variable to consider.
The Canadian government plans to dismantle the Canadian Wheat Board’s wheat and barley marketing monopoly next year.
An open market may make those grains more attractive to farmers than oats, Strychar said, but others said it is unclear how the marketing change will factor into the planting mix.
