Oats Surges To New High, Big Premium To Front-Month Corn Futures

February 26, 2014 12:16 AM

What Traders are Talking About:

Overnight highlights: As of 6:10 a.m. CT, corn futures are trading fractionally to 1 cent lower, soybeans are steady to 3 cents lower and wheat futures are fractionally to 3 cents lower. Cattle futures are trading higher this morning, while hogs are mixed with an upside bias in electronic trade.


* Oats hit all-time high. March oats futures surged above $5.00 yesterday, the first time an oats contract has topped that price point. The strength continued overnight, with the March contract pushing to a new high of $5.22. More importantly, front-month oats futures are now trading sharply (66 1/2 cents at the overnight peak) above March corn futures. May oats are also trading above May corn futures -- 21 cents above at the overnight peak. Major logistical problems in Canada are causing a supply shortage of oats in the U.S., and creating a short squeeze in the market.

The long and short of it: With March oats futures entering delivery Friday, the real fireworks may be yet to come. With open interest in the March contract at 1,435 contracts as of Tuesday's close, this has the potential to rival the 1996 short squeeze in corn futures or the 2008 short squeeze in Minneapolis wheat futures. The question is, whether other grain markets follow if that happens?

* Will corn demand hold up as prices rise. While the soybean market has been racing higher, corn futures have almost unwillingly limped higher. There's a general concern in the market that if prices push too high too quickly, it will slow the rebuilding of export demand that has been seen. Traders have been reluctant to push March corn futures much above the $4.50 level. Why $4.50? Well... that's the price point on the way down where export demand really started to pick up, signaling it as a "value" level. Common sense would suggest a sharp push above that level, it it is the "value" line, would then curb foreign buying interest. With the March contract entering delivery on Friday, the focus is shifting to May futures. The concern level seems to be $4.60 in that contract.

The long and short of it: There's only one way to test whether trade above $4.60 in May corn futures will slow export demand -- push above it.

* Parana soybean crop cut by drought. Drought has cut 2 MMT from the soybean crop in Parana, Brazil's second leading soybean production state, according to state officials. The state's ag department now forecasts soybean production at 14.47 MMT compared to a prior estimate of 16.5 MMT. Pro Farmer South American consultant Dr. Michael Cordonnier is currently in Brazil and says he doesn't feel beneficial late-season rains in Rio Grande do Sul, Brazil's No. 3 soybean state, and other parts of southeastern Brazil will not be enough to make up for earlier damage due to prolonged extreme heat and dryness. He also is concerned about heavy late-season rains in Brazil's top soybean state of Mato Grosso. Dr. Cordonnier lopped another 500,000 MT off his Brazilian bean crop estimate this week, lowering it to 88.5 MMT.

The long and short of it: Declining Brazilian bean crop estimates and continued export demand for U.S. old-crop soybeans have pushed March soybean futures to a contract high



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