Are Oats Still a Leading Indicator?
Jun 14, 2010
Chore time for me isn't what it used to be when I was growing up on our eastern Iowa farm, but doing horse chores in the morning before I head to work gives me a chance to clear my head and try to figure out what's really important for the markets that day.
I was thinking…
... about what's happening north of the border.
Friday afternoon, the Canadian Wheat Board (CWB) said it believes 8.25 million to 12.5 million spring-crop acres will go unplanted this year. Persistent rain in key crop areas is the reason. All wheat acres could be the lowest since 1971, says the CWB. Pro Farmer friend Mike Jubinville, the editor of Pro Farmer Canada, recently dropped me a note about conditions in Canada. Here are some of the highlights:
- Still premature for hard numbers, but it seems increasingly certainly that Western Canada will see the largest prevent planted acreage in our history for 2010.
- The rains through May and into June have been relentless...and there is even grave questions regarding production/quality of those crops that did make it into the ground.
- Split the Prairie region down the middle north-to-south. The western Prairies entered the spring under drought conditions... well no more. In the eastern Prairies... we remain under water. That might sound extreme, but the situation is grave with crop insurance deadlines running June 15-20. When the deadline hits, all seeding stops.
Up until late last week, the situation north of the border was being generally ignored by the Chicago markets. Now, terrible planting conditions in the Canadian Prairies is without a doubt a key market factor.
Wheat: I hate to say this... but even if seedings are the smallest since 1971, there is still enough wheat in the bin around the world that it probably won't have much impact on prices. Stocks are just too high. But, that doesn't mean the wheat situation won't impact markets. Unfortunately, wet conditions now could mean low-protein wheat when the crop is harvested. And low-protein wheat is exactly what the North American market doesn't need. We're harvesting too much low-protein wheat in the Southern Plains right now... and conditions in spring wheat country aren't "perfect" for high-protein wheat production, either. That'll be a big-time negative for wheat basis when all the discounts are figured in. If, however, you do have some milling-quality wheat, that stuff should fetch a premium basis later this summer. Perhaps the biggest impact will be on corn. The more low-protein wheat that's harvested, the higher wheat feedings will climb in the U.S. and Canada. That's a negative for corn-for-feed demand going forward.
Canola: Mike says the canola stocks situation in Canada is tight... and the lower-than-expected plantings for 2010 harvest will further tighten stocks. That should help support the canola market here and in Canada, and should be a positive for the U.S. soybean market, too.
Oats: I started on the floor of the Chicago Board of Trade in January of 1988. One of the first lessons I learned was to pay close attention to what happens in oat futures. It was a low-volume market dominated by commercial oat handlers. (In other words, there wasn't much speculative interest in oat futures until "things heated up.") Generally speaking, that's still the case. It's a low-volume market dominated by commercial activity. That means the oat market has been a "leading indicator" of what's really taking place in the grain markets. If there's general crop concerns, the oat market should be one of the (if not the) first markets to show that concern. Commercial grain handlers generally will not establish long positions unless they believe there is a good fundamental reason (tight supplies, big demand or a crop problem). Also, oats are one of the first spring-planted crops in North America and one of the earliest-harvested crops. That's another reason traders still believe oats can be a leading indicator for the rest of the grain markets.
If you haven't looked at an oat chart recently, you better take a look now. In just 5 days, September oat futures have rallied about 50 cents... that's a about a 26% gain in value in just 5 days! If oats are still a leading indicator for the grain markets, we've probably seen the "spring lows" posted and we should see the current upside price recovery continue a while longer.