As we discussed in our 2017 review of the oats market (and prices) and market structure last week, prices have declined for the commodity since mid-2016. At the start of 2018, we’ve seen some slight improvement in oats prices. New crop 2017/18 oats prices in Western Canada began the year around $3.50 – $4.00 CAD/bushel. New crop oats prices in the United States hovered near $2.25 to $2.50 USD / bushel.
So, what is on tap for the year ahead? We dive into a the state of the oats market and what factors will affect prices. In this in-depth assessment of the 2018 oats market, we’re going to cover such factors as:
• Oats acreage going into 2018/19;
• Chinese oats demand;
• North American oats demand;
• Economic outlooks and the impact of NAFTA; and
• When you should be selling oats in 2018 (and why!).
Right now, in our oats factors page on GrainCents, we’re watching nearly half a dozen different variables that we categorize as either bearish, bullish, or just noise for the complex.
If you’re wondering how we analyze things, you can easily read how we view and make sense of the grain markets here.
GrainCents oats readers also see our sales position for 2017/18 old crop and 2018/19 new crop.
Let’s dig into what FarmLead is expecting this year for oats prices and what’s going to be influencing them.
2018 Macroeconomic Outlook
We begin our assessment of the 2018 oats market with a glimpse into economic conditions.
Given the cross-border reliance that both nations have in the oats trade, we will assess economic activity in the United States and Canada.
In the United States, GDP growth could reach 3%, but such growth likely would not be sustainable beyond this calendar year. A conservative estimate for economic growth falls between 2% and 3%, with low unemployment and a slight increase in wages.
Fresh off its December 2017 interest rate hike, the U.S. Federal Reserve will continue to wade into uncharted waters as it begins the tapering of its $4.5 trillion balance sheet. Under the new leadership of Jerome Powell, America’s central bank is expected to raise interest rates several times again this year.
However, the Fed won’t make too many moves if concerns about weak inflation sustain well into the year. Rate hikes would have a strengthening effect on the U.S. dollar and would make American commodity exports less competitive against other international suppliers.
In Canada, economists anticipate moderate growth in the year ahead. Royal Bank of Canada has pegged expected GDP growth at 2.1% in 2018. The Bank of Canada is considering moves to raise interest rates at a time of moderate consumer spending and housing investment. A stronger Canadian Loonie against the U.S. dollar would affect the attractiveness of Canadian exports.
One bright spot for Canada remains higher energy and mining commodity prices.
Oil kicked off 2018 at their highest levels in three years. Despite falling production costs and increased output across North America, it appears that the world’s largest oil cartel (OPEC) has succeeding in improving the balance of global supply and demand.
OPEC and several other major oil producers agreed last year to extend a deal to cap excessive oil production through the end of the year.
It’s All About the Benjamins
Looking at 2018, oats prices will largely come down to demand and buyer activity on the U.S. side of the border. The United States is projected to produce just 49.4 million bushels this year (or 717,000 metric tonnes, according to the USDA.
Production has been trending downward since 2015/16 when American farmers topped out at 89.4 million bushels (or 1.3 million bushels).
This past year, just 2.6 million acres were planted, but only 801,000 acres got harvested. The latter number is down 25% from the five-year average of 1.07 million! It’s also down 18% from last yaer’s 981,000 acres of oats that got harvested.
American oat yields also dropped similarly, down just over 6% to 61.7 bushels per acre from last year and the five-year average of 66 bushels per acre.
What this all concludes to is that the U.S. has a rather large supply deficit that requires almost four times its production to meet demand. In 2017/18, U.S. consumption will total just over 2.7 million tonnes, a figure that represents a 7% increase from the previous year.
In addition to using up its own production, it’s estimated that the U.S. will have to import 1.72 million tonnes of oats in 2017/18. This represents just over 3/4s of total global oats trade, and is the third-largest amount of imports by the United States in the past decade.
With such large imports and lower domestic production, US ending stocks are set to close out 2017/18 with just 431,000 tonnes of oats left in the pipeline. That’s down 41% from last year’s 731,000 tonnes of leftovers and 31% below the fivc-year average of 625,000 tonnes.
Digging dipper, other than 2013/14 when carryout dropped to just 359,000 tonnes, this is the smallest amount of oats available at the end of a crop year in more than two decades.
More simply, moving forward, the only market that US and Canadian producers really need to worry about is the one with Benjamin Franklin on the $1 bill. (P.S. it’s the United States).
International Oats Demand Fulfillment
European Union remained the largest producer of oats in 2017/18, topping Russia and Canada, the number two and three producers, respectively.
The USDA has been estimating that EU oats production will top 8 million tonnes for the second straight year.
From a competition standpoint though, does it really matter?
Truthfully, oats is one those crops that other than the US and Canada, there isn’t a lot of international trade.
As mentioned, the United States is expected to account for just over 3/4s of total imports worldwide. In fact, over the past 20 years, just over 80% of all international oats sales end up making their way into the United States.
On the other side of the table, who owns the most exports?
For global 2017/18 exports, Canada is expected to own 75% of the market share, in line with the 10-yaer average.
So what about everybody else?
Frankly, they’re irrelevant.
China is the second largest importer of oats at just around 200,000 tonnes over the past 5 years.
Then it comes Mexico, average about 100,000 tonnes of oats imports.
On the export front, Australia is Canada’s biggest competition, shipping out around 300,000 tonnes annually over the past 5 years.
And then it’s the European Union, who, with their more than 8 million tonnes of production, export around 220,000 tonnes a year. It’s estimated that the EU will import just 5,000 tonnes in 2017/18.
Simply put, the US and Canada are by far and away the most important trading partnerships for oats.
Everyone else basically uses up their own production internally.
Thinking About 2018/19 Oats Acres
In 2017/18, global harvested area of oats hit 23.5 million acres. It was the seventh-straight year that global area started with the number “23”.
It’s actually almost creepy how little oats acreage has changed over this timespan.
Breaking it down, this is how harvested acres looked in 2017/18 compared to the year previous for the top 5 oats-producing countries:
• Russia: +2% to 6.92 million acres;
• European Union: +2.4% to 6.48 million acres;
• Canada: +16% to 2.6 million acres;
• Australia: -19% to 1.83 million acres; and
• United States: -18.5% to 801,000 acres.
Fun fact: Brazilian farmers are expected to combine 840,000 acres of oats in 2017/18. However, because of poorer yields, they were sixth in the world, in terms of production at 682,000 tonnes.
What should the markets expect beyond this year? You could easily argue that the global acreage number could be similar to last year.
However, global ending stocks of oats are expected to decline 17% year-over-year and 14% from the five-year average to 2.5 million tonnes. This nearly matches the last low, seen six years ago in 2012/13.
That’s going to be the subject of much speculation heading into the summer.
We believe that there will be a reversion to the mean in North America. The stark increase in Canada and aggressive pullback in the United States will come back to more normalized levels.
Specifically, for Canada, oats prices aren’t buying a lot of acres right now. This is why planted acres could easily fall back below 3 million acres (which is the five-year average).
In the United States, we could see numbers jump up by 100,000 acres or so.
Canadian Prime Minister Justin Trudeau has admitted that the ongoing NAFTA negotiations are keeping him up at night.
The two-decade old trade agreement between the United States, Canada, and Mexico is facing renewed pressures after the following of President Donald Trump.
Trump has taken a protectionist approach to international trade, a steep departure from his predecessors dating back decades. Trump immediately pulled the United States out of the Bush-Obama era Trans-Pacific Partnership (TPP), which threatens agricultural exports in Asian countries.
NAFTA is critical for oats producers in Canada who rely on U.S. and Mexican customers – in last year’s 2016/17 marketing season, Mexico and the United States accounted for over 96% of all Canadian oats exports.
Ninety. Six. Percent.
In addition, the uncertainty surrounding the trade agreement continues to shake confidence among railway operations that play a vital role in transporting oats and other agricultural commodities.
Nonetheless, today it is tough for us to anticipate any major changes to NAFTA given the negative impact it would have on U.S. workers and the increase in the cost of goods.
What About Chinese Oats Demand?
You might’ve heard through the grapevine (or reading ag publications lately) that Chinese oats demand is booming.
Is it really though?
Consumption is certainly on the rise: The country is pegged to consume 380,000 metric tonnes this year. That figure is actually down from the 440,000 slated from the previous year, but consumption had hovered in a range between 350,000 and this top-line number since 2013/2014.
As the nation grows more health-conscious, the world’s second-most-populous country bolstered its imports from 87,000 metric tonnes in 2012/13 to 278,000 last year in the 2017/18 marketing season.
This year, in 2017/18, it’s estimated by the USDA that China will import 200,000 tonnes – or almost 9% of global imports.
There’s just one problem: China places heavy tariffs on Canadian oat products.
Chinese demand could again double over the next three years; however, Australia’s free trade agreement with China has made it the premiere sourcing destination for imports.
Chinese demand could logically save the Canadian oats industry, but sweeping reform is required regarding trade policy.
The Prairie Oat Growers Association has lobbied to the Canadian government to fast track policy discussions.
However, negotiations on tariffs with China are notoriously slow.
When Should You Sell Oats in 2018? And at What Price?
For 2018 oats, there are a couple bearish and a few bullish factors pushing the market around.
So what does this mean for our selling strategy?
Currently, we are 40% sold on 2017/18 old crop and 0% sold on 2018/19 new crop.
Ultimately, it seems like more sideways trade than anything moving forward.
At this time a year ago, we saw some more generous oats prices in Western Canada. This included new crop values getting locked up at $4 CAD / bushel in Manitoba and $3.50 in Saskatchewan
Cue the collective lightbulb amongst all of us as to why Canadian oats acres in 2017/18 were so much higher.
If you were given those prices for new crop today, would you take it?
It’s a rhetorical question.
The answer is heck ya. We’d be somewhere around 30-40% sold at that level!
However, prices are not there today, and this is why we think 2018/19 oats acres in Canada will pull back.
As a reminder, set up your FarmLead Price Discovery for oats to make sure you’re aware of what cash spring wheat prices are doing around you.
A tighter North American balance sheet for oats is creating the best opportunity to price out our next oats sale.
Naturally though, any price rallies will be lassoed by the fact there is a much bigger crop in Canada.
Since oats prices on the cash market don’t really sync with the Chicago futures oats market, we’re not going to give estimates of what likelihood that oats prices go up or down.
That being said, we’re more concerned with the US Dollar-Canadian Dollar relationship. Since literally more than 90% of Canadian oats exports are going to the U.S., changes to that FX relationship can certainly stall or accelerate trade.