Grains –
The old saying of course is “oats knows”, but I found it somewhat humorous that virtually nobody knows what is going on behind the latest oats rally. I will state unequivocally that I know very little about oats, but I’ve done some asking around to people that do know oat “fundamentals”. The answer I got was not exactly what I expected.
I expected to hear the story surrounding a shortfall in Canadian production due to the wet conditions during harvest. To be fair, this certainly is part of the issue, but as we have traded this months ago I was/am reluctant to believe this was the sole reason for the price rally.
The key issue with oats right now apparently has to do with using glyphosate as a preharvest defoliate. I’m told oats ripen unevenly, making it difficult to harvest. Due to low prices in oats recently, it apparently has become uneconomic to swath oats and later pick them up. The new common practice is to use glyphosate as it is cheaper and faster.
This had led to a problem, however, with oats for human consumption. Many end users are now not accepting oats that test positive for glyphosate and this is making a big difference in the cash price for “quality” oats. So, right now it might not be exactly a shortage of oats overall but a shortage of oats that end-users actually want.
Obviously you can pull up a chart of oats and see what flat price has done, but look at what the spreads have done in just the past month. The market is telling you it needs something here. End users also have to encourage producers to grow oats next year without glyphosate, and this is going to come at a cost. I was told by one producer he has been contacted by a mill looking for contracts on 2017 crop with guaranteed no glyphosate.
The question for us futures traders is, how much of this should matter to the board and how much is up to the cash market to figure out? The Oct/Nov rally in oats, coinciding with Canadian harvest disruptions, also came as managed money traders were record short oats. Right now it appears the market has a relatively modest net long. This should mean the short squeeze is over. Still, spreads remain strong and the shortage of non-glyphosate oats obviously can’t be eliminated until 2017 planting at the earliest. Some will point towards the “oats knows” saying and try to draw towards a correlation with corn, but any correlation calc shows a flimsy relationship at best. Still, we all know by now to not let the facts get in the way of a good story. It’ll be interesting to see how this all plays out.
So to repeat, I don’t know much about oats myself and don’t claim to be an expert. Let me know if you hear anything different. This will likely be my last mention of oats in 2017.
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