Knowing that 2018 Planting could be late this spring and more oats could get seeded, what might the Canadian oats balance sheet look like?
Last week, we showed what the supply and demand situation could look like for US oats in 2018/19, given the information on the seeded acreage for US oats in the Prospective Plantings forecast on March 29. The main conclusion though is that weather and Canadian acres will drive a lot of what the US does.
Given the nasty weather that hit Western Canada over the past weekend and the tangible scenario of delayed seeding, the discussion surrounding the oats acres in Canada is relevant now more than ever. This week, we’ve seen some quotes from Canadian traders expecting a moderate (up 5% year over year) to a sharp expansion (up 10% year over year) of oats acres this year.
Thus, it looks like oats could be the major crop in the battle for acres in the Canadian Prairies.
On a crappy weather like this, other cereal options major crops such as wheat or malt barley have a stronger likelihood of being downgraded into the feed channels.
In comparison, oats can tolerate cooler temperatures, hence making a viable crop for the Canadian Prairie producers to bet on in 2018/19.
In Agriculture Canada’s 2018/19 forecast, which Brennan discussed in early February, Canadian oats acres in 2018/19 are set to expand by 2,5% year-over-year to just under 3.3 million acres. This is also a 6.5% increase from the five-year average, pegged at roughly 3.1 million acres.
But before we delve into our Canadian oats S&D simulation, we would prompt you to take a look at some long-term Canadian and US oats acreage and yield comparisons as they were pertinent to our S&D work.
The table below depicts Canada’s supply and demand table for oats over the past six marketing years (2012/13 to 2017/18) and three scenarios for 2018/19: Agriculture Canada’s forecast dated March 2018 and two FarmLead’s forecasts dated April 2018 that incorporate ideas of oats acreage estimates gathered from Canadian trade.
As a refresher of the most bullish situation we’ve seen in recent years, due to weather-related problems in the fall of 2012 at harvest, Western Canada’s production of oats plummeted. The following year, farmers planted more oats and the market transitioned from a period of scarce supplies in 2012/13 to abundant supplies throughout the 2013/14. Put another way, the stocks-to-use ratio went from nearly 14% in 2012/13 to more than 32% in 2013/14.
How about oats prices?
As the table shows, oats prices went from an average of $4.06 CAD per bushel in 2012/13 to an average of $4.33 CAD per bushel in 2013/14. This, despite ending stocks climbing to more than 1 million tonnes.
It seems counterintuitive, doesn’t it? The answer lies with other market factors other than the ending stocks. We’ll get into this in a minute.
Moving forward, for 2018/19’s supply side of the equation, the two FarmLead scenarios assume that seeded acreage expands roughly by 5% and 10% to roughly 3.36 million and 3.52 million acres respectively. Both scenarios are above Agriculture Canada’s current estimate of 2.3% higher acreage totaling 3.27 million. As we said, this is mainly due to the recent snow and colder weather that could positively impact the final amount of oats acres that get seeded
In both FarmLead’s forecasts, we will use an average yield of 87 bushels per acre (above the 5-year average of 85 but below Agriculture Canada’s 2018/19 estimate of 90 bushels per acre). We also assume a “middle-ground” acreage abandonment rate of 19% (below the 5-year average of 19.43% but above Agriculture Canada’s estimate of 18.87%).
Based on these two variables, for a 5% increase in acres, one could expect a crop of 3.65 million tonnes. For a 10% increase in acres, we would expect to see about 3.82 million tonnes of oats produced in the Canadian Prairies. This would still not exceed Canada’s oats production in 2013/14 of 3.93 million tonnes but it is above the 5-year average of 3.27 million.
On the demand side, the structure remains strong both domestically and internationally and so there’s really no reason that this should change in 2018/19. We see domestic demand totalling 1.17 million tonnes, broken down by Food & Industrial use of 180,000 tonnes and 990,000 tonnes going into the Feed & Seed column).
2018/19 Canadian oats exports of 2.3 million tonnes would be in line with AAFC’s current forecasts, but also the trend of Canadian oats exports to the US in the past few years as we showed in our comparison of the oats markets on both sides of the border.
In FarmLead’s 2018/19 scenario of a 5% acreage expansion year-over-year, the net result is Canadian oats ending stocks edging higher to 1.18 million tonnes. This would be a 20% increase from the 987,000 tonnes expected to be available at the end of 2017/18. Accordingly, the stocks-to-use ratio could rise from about 28% in 2017/18 to almost 34% in 2018/19. At a first glance, this scenario would be mildly bearish and would not really support upside price potential without outside influencers like currency or international demand factors.
In FarmLead’s 2018/19 scenario of a 10% acreage expansion year-over-year, the net result is heavier ending stocks up to 1.35 million tonnes.This would be an increase of 38% year-over-year. Accordingly, the stocks-to-use ratio could advance to almost 39% in 2018/19. Again, this isn’t exactly bullish but that’s what happens when acres expand and demand does not grow proportionally.
Ag Canada is currently forecasting an average oats price in 2018/19 of $3.28 CAD / bushel. With the likelihood of bigger acres and bigger production, it seems logical that prices would have to drift a bit lower.
A quick glance at some marketing years such as 2007/08, 2013/14, and 2017/18 raise some question marks. These years point at the opposite situation that is Canadian oats prices headed higher despite supplies being abundant.
This seems illogical, doesn’t it?
That in mind, we would argue that other market factors such as the exchange rate drive Canadian oats prices, as shown on this chart.
A quick glance at some marketing years such as 2016/17 and 2017/18 suggests that a weak Loonie indeed lifted Canadian oats prices higher.
With more than half of Canadian oats production exported to the US, the exchange rate is a major driver of oats prices in Canada. At the time of this writing, the Canadian Dollar has run into resistance at 80¢ USD.
While the two FarmLead’s scenarios of 2018/19 are entirely hypothetical, the purpose was to go through the mental exercise of what oats market conditions in Canada could be.
Obviously, a lot of this hinges on the weather, exchange rate, as well as with oats acres in Canada.
Thus, acreage, weather, and now, exchange rates will be the three, clear factors to watch going forward.