Can Oats Prices Continue to be “Darling” in 2020?
In early December 2019, I looked a bit deeper into oats prices, noting that while the cereal had been a “darling” in terms of return, it was getting a little toppy heavy. Unfortunately, for those who did not pay attention to this advice, we saw oats prices be a bit of the outlier of the grain markets in December, being the sole loser of the complex. Basically, the levels seen in late November dissipated as farmer sales and buyer coverage snapped up healthy prices, leaving oats prices with a 3% – 5% decline for the month.
Ironically, only new crop oats prices found gains in December 2019. However, when looking at the quarterly performance on the futures board in Chicago, it was the opposite: old crop oats prices made gains from September whereas new crop values dipped. The obvious question now is where will oats prices go in 2020?
Oats Prices (Were) Helped by Lower Oats Harvest
Part of the reason for fade in oats prices was the large-than-expected oats harvest shared by Statistics Canada back in December. In their final production estimate of the year, StatsCan raised the oats harvest by nearly 150,000 MT for a grand total of 4.16 MMT. This equals a 21% jump year-over-year and 24% more than the five-year average.
Looking globally, the worldwide oats harvest for 2019/20 was 22.43 MMT, slightly below the five-year average. However, it was a rebound from last year as the 2018/19 EU oats harvest was below average due to the drier conditions. Basically, with both Canadian and European harvest coming in bigger than last year, it more than offset notable declines in Australia, Russia, and the U.S., the other major players I tend to watch.
Speaking of the Land Down Undaa, due to a third straight year of drought, the Aussie oats harvest fell below 1 MMT for the second straight year. Apart from the 2018/19 oats harvest in Australia, the last time farmers produced less than 1 MMT off their paddocks was all the way back in 2006/07. That said, with a smaller haul in Australia, this might open the door for some more Canadian oats to go into the usual Australian market.
Oats Prices Benefit if Exports Diversify
That said, the one market that Canadian oats aren’t able to get into is China. The People’s Republic imports more than 95% of their oats from Australia, and don’t bring in anything from Canada for phytosanitary reasons (or you could potentially read between the lines here and suggest that it’s politics).That said, there are other countries in Asia (i.e. Japan and South Korea) and Latin America (I.e. Ecuador) who are increasing their oats imports.
By far though, the U.S. remains the largest customer for Canadian oats and the world, accounting for 72% of all global imports. Given some of their production issues this year thanks to the late spring and early fall/winter, there are rumours buzzing around that the U.S. is importing more oats from Canada for both cover crop and conventional seed. Currently, Agriculture Canada is forecasting total 2019/20 Canadian oats exports at 2.6 MMT, a slightly increase from last year. If realized, it would also be the most for Canada since 2007/08 when 2.805 MMT left the Great White North.
If you’re reading between the lines, basically Canadian oats that marketing year made up for less production from Australia. That said, so far through Week 19, Canadian oats exports have totaled almost 665,000 MT, basically matching last year’s pace.
Oats Prices Appreciate Alternative Milk Demand
ne of the interesting demand functions that we’re seeing more headlines about is oat milk.  The problem is, from a demand function, it’s not a huge amount: about 500 MT (about 1.1M pounds) of oats can be used produce about 5M litres of oat milk.
Right now, I’m estimating that oat milk accounts for about 100,000 MT of total raw oats demand, but if it does take market share away from almond and soy milk (which own about 64% and 13% of the alternative/non-dairy ”milk” market), then this demand function could rise. I think however, it’ll be a slow-moving growth train so don’t expect it to add a dollar a bushel to your oats prices tomorrow!
Oats Prices Could Remain Strong in 2020 if….
All the above in mind, the slight increase in the Canadian oats harvest will push 2019/20 oats ending stocks up to 650,000 MT, according to the AAFC. This is nearly 60% higher than a year ago, albeit still 9% below the five-year average (albeit that’s a bit skewed thanks to some big carryout years!).
I think that a stronger pace of oats exports could materialize, thanks to the smaller harvest in Australia, but like in 2007/08, it might be realized until the 2020/21 crop year. Thus, I think that final 2019/20 oats ending stocks in Canada could fall back below 500,000 MT. If this is realized, it would have an impact globally as ending stocks would then drop below last year’s record low. That said, the USDA is currently forecasting that global oats carryout will finish 2019/20 with the second-lowest number ever.
Thinking seasonally, oats prices tend to find their lows sometime in the spring (think April/May). Looking at the chart below, last year was a bit of an anomaly as the market was looking for more oats acres for Plant 2020 and bought them through thanks to a solid rally in the first calendar of 2019.
Using history as the benchmark, oats acres tend to decrease a little after a big-than-expected harvest in the previous year. That said, oats prices, even after their pull-back in December, as still looking pretty strong. Comparing its ROI against the likes of malt barley or hard red spring wheat for 2020 though, oats still pencil out pretty well. Accordingly, I think oats prices will trade in a more narrow range in 2020 (compared to the 2019) but will still stay relatively strong.
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