Tuesday, June 28, 2011

Attractive forward prices for Oat, but is there still upside?

News on the ‘ol oat trade is sparse at best with the trade not as transparent in regard to price discovery as say wheat or canola. With the domestic trade dominated by a handful of mills and exporters, so what (if any?) are the global impacts that will influence prices leading into next harvest?

Australian Crop Forecasters have estimated that this season sown area is 832,650/ha, which is down from the 5-year average of 979,861ha. However based on heavy summer rain, the early forecast is for a national yield of 1.55t/ha (1.29mmt), which is up on the 5-year forecast of 1.22mmt.

Looking at international production, the European Union has been in a downward spiral for the past 30 years, with production forecast to climb to 7.6mmt from last years record low but still behind the five-year aver of 8.3mmt. Major producing counties tonnage is forecast higher, and if this continues surplus tonnage for export may be available.

Stats Can released their latest sowing estimate last week, with total area sown at 3.8 million acres (+ 31% from last), however still down from the 5-year average of 4.3ma. Trade estimate that actual sown area is likely to be closer to 3.1ma. As the survey was conducted prior to serious and significant sowing delays and problems in eastern Canadian prairies. The actual figure even may be lower as oats are generally the last crop seeded, especially with much higher returns on offer for canola and wheat (with both crops at record planted acreage).

International oat futures and cash prices despite extremely tight fundamentals will continue to respond to outside macro factors. And like other grains traded on CME, oat futures are currently in a period of extremely high prices. After peaking at $233/t earlier this month, spot futures are currently sitting at US$ 363c/bu (A$ 200/t) This is an interesting price resistance level, with prices testing this but failing to go below this since October last year.

Back home, old crop milling oat prices have been languishing around $270/t FIS in WA (feed oats $20 discount) since the start of 2011, and recently feed oats have been trading at a premium to FED1. While currently in Victoria milling oats have been bid at $230 into the GV, whilst feed quality is a further $35 discount. Looking forward to new season prices CBH has got feed oats at $245, whilst the FED1 leg of the APW MG contract is at $205, making oats a very attractive option. Mind you the FED1 leg is historically very high at -$80/t.

The general feel international is a bullish tone is swirling around the oat pit with a high percentage that oat prices will rise further. The worlds biggest exporter Canada (and our main competitor into Asian destinations) have got with very tight domestic stocks after last years crop was the worst in nine years after wet weather played havoc across the prairies. This has also been exacerbated by the potential loss of sown acreage this year and the drop in oat prices relative to corn and other grains could begin to see increased demand for oats in feed rations.

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