Canada Markets

Oat Futures Higher and For Good Reason

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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December oat futures broke out higher from the range traded over more than seven weeks, narrowly missing a close above resistance at $2.80 1/2 per bushel, the 50% retracement of the move from the contract's June high to July low. The line on the second study shows the Dec/March spread at minus 1 cent, close to inverted territory. The lower study shows the move well supported, with the daily volume in the December the largest seen over the life of the contract. (DTN ProphetX chart)

Wednesday's ag futures trade points to growing concerns seen in the oat market, with the December contract ending 5 1/4 cents higher at $2.79 3/4/bushel, while breaking out of a sideways range traded since July 19 and reaching a seven-week high. This marks the fifth higher close in six sessions, with the Sept. 5 close ending unchanged. Wednesday's move resulted in a bullish outside-day bar formed on the daily chart.

Wednesday's high failed to sustain a move above resistance at $2.80 1/2/bu., the 50% retracement of the move from the June high of $2.99/bu. and the July low of $2.62/bu. The line on the second study of the attached chart shows the Dec19/March20 spread ending at minus 1 cent (March trading over the December). Over the past three years, this spread has ended close to an 8 1/2-cent carry on this date, while has trended higher since Aug. 30 and could soon end in inverted territory with the front-end December trading above the March.

While not shown, Wednesday's range saw the December trade below its 20-day, 50-day, 100-day and 200-day moving average, only to recover and close higher.

While not shown, noncommercial traders have held a bullish net-long position on a weekly basis for almost one year, while the strengthening futures spread points to a bullish response on the part of commercial traders. Between them, volume was reported at 1,087 contracts on the December contract on Wednesday (lower study), the largest one-day volume reported over the life of the contract.

A number of recently released reports points to problems ahead for oat market fundamentals that should continue to support prices and provide further lift for the market.

On Sept. 6, Statistics Canada reported July 31 ending stocks for 2018-19 at 414,000 metric tons of oats, close to the 400,000 mt that AAFC had previously penciled into its supply and demand estimates, down 46.8% from the previous crop year and the lowest carryout estimated since the 2001-02 crop year when 363,000 mt was estimated. Stocks in commercial positions at the end of the crop year, at 115,000 mt, are the lowest reported since July 2007.

On Aug. 28, Statistics Canada estimated Canada's 2019 oat production at 3.9526 million metric tons, up 15% from 2018 and the highest production estimate seen in 11 years, or since the 2007/08 crop year. Recently the Manitoba Co-operator quoted Scott Shiels, of Grain Millers Canada at Yorkton, Saskatchewan, saying "even with the 15% increase in production, which is based off of the 20% increase in acres, we need all of this and more." He added, "we're going to see buyers paying what they have to pay."

This may be confirmed in the August USDA WASDE report, where the oat data shows U.S. ending stocks estimate for 2019-20 left unchanged from the previous crop year at 37 mb, while requiring a 26.4% increase in imports to 110 mb (1.7 mmt), the largest in 11 years, according to USDA data. These estimates will be updated on Sept. 12.

Then there's the pace of harvest for oats. This week, the USDA reported that 89% of the U.S. crop has been harvested as of Sept. 8, down from 96% harvested as of the same week in 2018 and the five-year average of 95%. Furthest behind is North Dakota, with an estimated 72% of the oats off, down 15 points from the five-year average.

Manitoba's crop report estimated that 71% of the province's oat crop has been harvested as of Sept. 10, close to the three-year average of 74%. Tough and wet grain is being taken off where possible and there are reports of sprouting and mildew. Statistics Canada's small area data points to the Southwest Region, the Central Region and the Eastern Region harvesting 83% of the province's oats in 2018, while the largest harvest delays are seen in the Southwest Region. This week's crop report shows 60% of the Southwest Region's oats is harvested, with this region harvesting 24% of the province's oat crop in 2018.

As of Sept. 2, Saskatchewan Agriculture estimated the province's oat harvest at 8% complete, while this will be updated on Thursday but will provide little relief for market watchers given the wet conditions faced over the week.

Low temperatures and more rainfall forecast for the next seven days will add a further challenge to the harvest across the Prairies.

Chart resistance is seen at the 50% retracement level of $2.80 1/2/bu., the 61.8% retracement at $2.85/bu. and the 67% retracement at $2.86 3/4/bu.

The next government report is set for Sept. 12, when Statistics Canada releases its model-based production estimates. Over the past four years, the model-based report added 100,000 mt to the previous Canadian oat production estimate based on July surveys in two of the years, while reducing overall oat production by 100,000 mt in two of the years. Over the four-year period, the report has tended to come in close to previously released estimate.

Cliff Jamieson can be reached at cliff.jamieson@dtn.com

Follow him on Twitter @Cliff Jamieson

(ES)

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