Attention, oat producers. Randy Schnepf at the USDA wrote earlier this month that rainfall in 2017 “appears to have lowered sorghum, oat, and forage-crop prospects in affected regions.” 
Leave it to the USDA to not have a definitive answer on the impact of the weather on American oats production.
If the weather did in fact cut significantly into U.S. oats production, the question is if anyone will notice right now.
It will be another two weeks before the USDA offers its latest update on the state of global oats production in the November WASDE report. However, the USDA’s recent Small Grains Report submitted a somewhat alarming figure on the expected U.S. oats output.
Analysts expect the global oats harvest to decrease by 3.2% in the 2017/18 calendar year. Meanwhile, the agency projects US production to drop nearly 24%.
That decline is even higher in drought-plagued Australia, where year-over-year production is pegged to decline by nearly 44%. This number will be key for producers, as we will explain later.
Given that Australia and the United States are ranked fourth and fifth regarding global production (counting the European Union as a single market), the loss of the expected output will require other countries to bolster production.
Where are the sellers in this market?
We break that down and more.
Quality and Drought Batter Smaller Markets
Last Thursday, we spoke about an odd phenomenon happening in Iowa. Though Quaker Oats is the largest cereal producer in the world, its Iowa facility does not purchase any oats from Iowa farmers. As we noted, oat quality is one of the key factors in why Quaker and many other buyers turn to Canadian options.
In the U.S., total domestic production is expected to fall by 23.7% to 717,000 metric tonnes (or about 46.5 million bushels if you’re converting those tonnes into bushels at GrainUnitConverter.com). As noted in the chart below, the production figure is more than 30% below the five-year average.
Oat prices have tanked since 2014 when they hit an all-time high on the Chicago Board of Trade. With current prices hovering at multi-year lows it’s not surprising that American farmers seeded far fewer acres in 2017/18.
Total acres this past year in the US is slated to have declined by 8.5% from last year and more than 10% from the 5-year average to nearly 2.6million acres.
The number of acres harvested is expected to hit 801,000 acres in 2017/18, a total that is roughly 18% lower than the previous year’s figure.
The USDA projects that just five states will see an uptick in oat acreage this year.
While prices play an important role, so does weather in the decisions of farmers.
In drought-plagued North Dakota, total area harvested will fall from 110,000 acres to roughly 80,000, according to the USDA. In South Dakota, the figure plunges from 110,000 to 60,000. We’re anticipating a big decline in yields as well.
The USDA says that the nationwide average for oat yields will hit 61.7 bushels per acre. That’s about 6.5% down from last year AND the five-year average.
With U.S. production falling and the U.S. dollar getting stronger, buyers are continually looking beyond the borders to locate cheap oats. The chart below outlines the year-over-year import totals for oats into the United States.
While the sharp downturn in 2015 imports is tied to record prices the year prior and ensuing surge in domestic production, US oats imports have been steadily increasing over the last five years by an average of 2.3%.
In 2017/18, US imports of oats will increase again, according to the USDA. U.S. imports will represent more than 75% of all cross-border purchases of oats this year.
So, where are these oats coming in from? Here’s a breakdown of what to expect in the year ahead.
Can Europe and Canada Meet Demand Abroad?
The European Union will remain the largest producer of oats in 2017/18, topping Russia and Canada, the number two and three producers, respectively.
However, the EU does not see strong growth in production or harvested areas, according to the USDA. Next year, EU production should increase just 1.6%, according to the USDA. The forecasted production figure is also 1.6% above the five-year average.
However, exports will likely increase by a significant amount.
In the United States, oats have seen a decline in their use for animal feed. Canadian production has shifted to U.S. millers and processors like Quaker Oats. That downturn in feed has cut out Finland and other Scandinavian competitors.
Remember when we said that the U.S. imports 75% of international shipments. That number mirrors Canadian exports, which the agency expects to come in just below that 75% threshold of total shipments this year.
Thus, it’s no surprise that the expected the growth of oats by America this year of nearly 11% is right in line with the growth of Canadian export of oats.
According to both the USDA and Statistics Canada, Canadian production of oats this year will increase by more than 15%. This uptick will push output to somewhere around 3.7 million to 3.8 million tonnes.
This has obviously weighed on prices.
Ahead of seeding this spring, we saw $3.50 to $4 per bushel available across Western Canada. We did see concerns about quantity and quality of this year’s Canadian crop, but those have since faded. As such, bids today across the Canadian Prairies are closer to $2.75 to $3.25 per bushel.
This year in 2017/18, the USDA expects Canadian exports of oats to grow by 150,000 metric tonnes. That’s more than the total export growth forecasted worldwide by the USDA: 119,000 MT.
Global export growth will increase by 5.2% this year, according to the USDA.
Meanwhile, the European Union should experience a 32.4% jump in shipments this year.
Oat Producers Need More Insight into the Global Markets
One of the most important stories for oat producers is not in the Western Hemisphere.
China’s demand for oat products is booming. 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 200,000 metric tonnes in 2016/17, according to the USDA. That latter figure represents almost 9% of global imports.
But you wouldn’t know that here.
Farmers make acreage decisions during the fall. Low prices have not bolstered optimism for the crop. With oat prices well below spring wheat prices, few analysts expect oat seeding to experience a magical upswing.
One of the key reasons we don’t see a big bump in planting is China’ impact. Though demand is booming, the nation places heavy tariffs on Canadian oat products.
Who is feeding China’s rising demand for oats?
Though Australia has a free-trade agreement with China, keep in mind that the USDA foresees a sharp production decline in the Land Down Undaa. Despite this year’s downturn, Australia will export a little more than 10% of all global oat shipments in 2017/18.
In the future, China could help bolster prices, but we would need to see tariff relief for Canadian oats. It will be a critical factor to monitor in the global oats markets in the years ahead.
In the meantime, FarmLead will continue to dive into the key factors affecting the North American oats markets.
Things to watch out for include the impact of Canadian ending stocks, 2017/18 plantings in North America, the difference in oat prices at the Chicago Board of Trade and in the cash market, competition for rail space, international currency fluctuations, the use of oats in the U.S. feed industry, and more.
What we do know is that with margins tight again for those growing corn, soybeans, or wheat, perhaps oats become more important in North America moving forward.