Oat lovers may have nervously downed their favorite breakfast the past week after seeing US futures of the grain rocket without much explanation. The good news for them is that the market action in Chicago is unlikely to change the boxed price of the cereal anytime soon – or might not all, if history is a guide.
A week into August, oats futures on the Chicago Board of Trade are up 12 percent on the month, with more than half of those gains – 6.7 percent precisely – coming from Monday’s trade alone. The market has risen in eight of the past nine sessions, topping the daily performance chart of 60 commodity and global macro futures tracked by Barchart since Friday.
Reasons cited by analysts range from worries about the drought affecting both the quality and volume of European-grown oat to speculation that the US-China trade war could prompt Beijing to begin buying oat from top producer Canada to avoid paying tariffs on American feed grains.
Monday’s peak of $2.6690 per bushel on the CBOT placed oat near 5-month highs and on track to a 11 percent gain for 2018 after a rally that has persisted since April, with the exception of last month. While nowhere near the 34 percent gain posted by CBOT wheat on the year, oat has outperformed the two other major US grains markets – corn and soy, which are up 6 percent and down 8 percent, respectively.
And the upward trajectory may not be over yet, with Investing.com’s daily technicals still calling for a “Strong Buy” and citing stiff Fibonacci-based resistance only from $2.75 per bushel onward – about 8 cents above Monday’s settlement. Some analysts have a higher target of $3 per bushel.
Current Rally Purely Driven By Speculation?
“Other than being a nice, round number, there’s nothing really fundamental or technical to support that $3 forecast,” said Shawn Hackett at Hackett Financial Advisors, a grains analysis service in Boyton Beach, Florida. “It tells you of the sheer speculation that’s driving this market, and I think it’s all to do with China possibly looking at Canadian oats to circumvent their US feed imports.”
But Hackett also thinks Beijing’s stringent “Photosanitary Protocol” for grain imports will end up hampering the entry of Canadian oats, resulting in the CBOT rally eventually running out of steam. With rice, for example, China opened for imports in 2001 but only started taking US product last year after the two agreed on the protocol.
Impressive as oat’s milestones and prices are now, the market remains one of the smallest components of the US agricultural complex, with just about 25 million bushels trading on the CBOT compared with the more than 9 billion bushels of open interest in corn.
The less liquid conditions for trading oat versus major grains means that it takes just a handful of speculators sometimes to create a big move up or down in the cereal’s futures.
Futures Moves Have Little Impact On Real Prices
Spikes and tumbles in CBOT oat seldom, if ever, filter through to the physical market, which determines what leading oats brands such as PepsiCo (NASDAQ:PEP)’s Quaker, B&G Foods (NYSE:BGS)’ McCann's and Trader Joe’s pay for the raw material. With the US oat production barely covering domestic demand and the country not shipping any for exports, international physical prices vary by origin of the grain – whether they are Canadian, Australian, German, Finnish or Swedish – and by grading that separates oats for human consumption from that for animal feed.
“A number of the people who deal in the physical product don’t even use the futures because of its exaggerated volatility,” said Chuck Penner, an analyst who specializes in Canadian crops for Winnipeg-based Leftfield Commodity Research.
“The physical average price for oat is around $2 per bushel now, and that’s a 70-cent discount from the futures,” Penner said. “Even if you move the futures up to $3, it wouldn’t make a material impact on a bag of oatmeal.”
While he agrees with Hackett that the current futures rally is almost entirely speculative, he thinks the buying is being driven by worries about how crops were wilting to extreme heat in Europe, rather than Canada’s potential to export oat to China.
“The only thing that’s really changed in the last few weeks is the recognition that the European crop is in trouble,” Penner added. “Otherwise, both demand and supply are pretty stable.”