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Oats Trading


The Ultimate Guide

Why Are Oats Valuable?

Oats are a cereal grain with high soluble fiber content. They are a source of food for both humans and animals and an ingredient in the production of cosmetics.

Oats have been growing wild in West Africa since around 12,000 B.C. The first wheat and barley farmers viewed the plant as a weed and a nuisance.

Around 2,000 BC, when wheat farming began in Scandinavia and Poland, farmers observed that oats grew better than wheat in the cold, wet climate of Northern Europe. Nearly 500 years later, farmers in this region began intentionally growing oats. Therefore, oats were one of the last cereal grains to be domesticated.

Today, oat production exceeds 22 million metric tons annually and takes place in diverse countries across the globe. The importance of the crop as both a source of animal feed and a highly nutritious food for humans ensures it will remain a leading global commodity.

How Are Oats Grown?

Oats are a member of the grass family and grow best in cool weather conditions with full sunlight and average, well-drained soil. The crop can tolerate light frosts, but will die when temperatures drop below 5 degrees Fahrenheit.

One of the advantages of growing oats is that the crop does not require intensive maintenance. When planted with other cover crops such as winter peas or winter beans, oats require no additional feeding.

Farmers generally plant oats either in the spring or late summer. Using a broadcast seeding method, they spread the seeds in rows about 3 inches apart.

Oat Plant
Oat Plant – Image via Pixabay

The crop goes through several stages of growth before it is ready for harvesting. Oats planted in September will have the following developmental timeline:

Foundation

During the first six months of the plant’s life cycle, three important developments take place:

  1. Root growth – the oat plant produces roots between September and March.
  2. Leaf production – the plant begins leaf production in September and develops its first visible unfolded leaves in November. By December the plant will have developed nine or more unfolded leaves.
  3. Tillering – In December the plant develops its main shoot. By February it develops nine or more tillers.

Construction

The next phase of the crop growth occurs between April and May. Three developments occur:

  1. Stem elongation – The crop’s ears and nodes appear.
  2. Booting – The flag leaf sheaths extend and open.
  3. Ear emergence – The ear emerges above the flag leaf.

Production

Between June and August, the crop completes the final stages before harvesting:

  1. Flowering – the plant begins to flower, which signals the beginning of the harvesting season
  2. Milk development – the grain becomes watery ripe.
  3. Dough stage – the grain accumulates starches and proteins and increases its dry weight
  4. Ripening – the grain hardens and becomes difficult to divide.

Oat harvesting times vary by region. Typically farmers try to time the harvest to occur when the grains have reached 35% moisture – when the green kernels on the plant are beginning to turn a cream color. Harvesting occurs by swathing, or cutting the plants to about 4 inches above the ground. The swathed grains are placed in windows and dried in the sun.

World's Biggest Oat Producing Regions

Top 10 Oat Producing Countries

RankFlagCountryOats Produced (Thousand Metric Tons)
#1Flag of European UnionEuropean Union8,073
#2Flag of RussiaRussia5,440
#3Flag of CanadaCanada3,700
#4Flag of AustraliaAustralia1,100
#5Flag of USAUnited States of America717
#6Flag of BrazilBrazil682
#7Chile FlagChile670
#8Argentina FlagArgentina660
#9Flag of BelarusBelarus500
#10Flag of UkraineUkraine481

Oat millers produce several food products from harvested oats:

Top 7 Oat Products

ProductDescription
Whole oat groatsOats that had the hulls removed and have been heat treated to inactivate enzymes
Steel cut oat groats
Whole oat groats that have been divided into two or four pieces
Whole oat flourWhole oat products that have been ground through hammermills or rollstands
Low bran oat flourFlour produced through bran production that has lower protein and fiber content than whole oat flour
Crushed oatsLightly ground whole groats, steel cut or flakes
Large flake rolled oatsRolled whole oat groats that have been cut into various thicknesses
Quick, baby and instant rolled oatsManufactured by rolling steel cut oat groats

The majority of harvested oats – 95% in the United States are used in animal feed. Yet oats have many health benefits for humans:

  1. High soluble fibers – Oats make you full longer and regulate blood sugar and cholesterol.
  2. Anti-inflammatory properties – Oats have been clinically shown to prevent inflammation and heal dry, itchy skin.
  3. Best amino acid balance of all cereal grains – Oats are used as a water-binding agent in skin care products, shampoos, moisturizers and cleansing bars.

Some food products that use oats include cookies, cereals, bread, muffins, crackers, snacks and even beer.

What Drives the Price of Oats?

The price of oats is generally highly correlated with the price of other grains such as wheat, corn and barley. Most of the economic and trade factors that move oat prices affect agricultural commodities in general. The biggest drivers of prices include:

  1. Supply
  2. Weather
  3. Price of Corn

Supply

The United States Department of Agriculture (USDA) publishes monthly data on global production, consumption, trade and stocks of oats. Traders carefully monitor these numbers for evidence of supply shortages or surpluses.

In recent years, these numbers have been very consistent with only small year-to-year fluctuations in output and consumption.

However, sudden positive or negative surprises could move markets. Traders should monitor the dates of these releases as they can produce volatile trading conditions.

Weather

Weather affects all agricultural crops, and oats are no exception.

If crop yields suffer as a result of a prolonged freeze or an extended drought, then oat prices could spike higher. On the other hand, ideal weather conditions could produce a bumper crop and depress prices.

drought via pixabay
Drought Conditions Can Severely Impact Oat Production – Image via Pixabay

One factor that somewhat mitigates the role weather plays in oat prices is the global nature of production. Unlike commodities such as coffee or orange juice, where production is heavily concentrated in a small number of countries, oat production is spread out across many regions. Poor growing conditions in one region of the world are sometimes offset by favorable conditions in another area. Nonetheless, weather still has the potential to impact prices.

Price of Corn

Since the primary use of oats is as a feed grain, the price of competing feed grains – especially corn – can impact its price.

If the price of oats rises significantly higher than corn, then farmers might shift toward corn for their feed. Of course, if oat prices are significantly lower than corn, then oat consumption could increase.

Over the last several decades, the price of oats has been highly correlated with corn prices. Many professionals trade the spread between these two commodities by buying the one that’s historically cheap while simultaneously selling the one that’s historically expensive.

Traders looking for clues about oat prices should pay attention to the spread between these two commodities.

3 Reasons You Might Invest in Oats?

Investors purchase agricultural commodities such as oats for many reasons, but the most important ones include:

  1. Inflation Hedge
  2. Bet on Demand Growth
  3. Portfolio Diversification

Inflation Hedge

Investing in oats is a way to bet on higher inflation.

The US Federal Reserve Bank and central banks around the world have kept interest rates low for a long time. These policies are likely to continue since they support consumer borrowing and spending.

Low interest rates have produced speculative bubbles in many assets classes, but not yet in agricultural commodities.

Yet food remains the most basic and fundamental necessity. Food commodity prices could see the largest increases if the economy experiences higher inflation. Oat prices could benefit from these conditions.

Bet on Demand Growth

Oat prices may benefit from strong global economic growth.

The demand for oats in livestock feed could grow as the global population gets wealthier and consumes more meat. As corn and other ‘fuel’ grains get siphoned into biofuel production, farmers will need grains for producing livestock. Oat consumption could benefit from this development.

Oat demand may also benefit from the population seeking healthier foods to consume.

Portfolio Diversification

Most traders have the vast majority of their assets in stocks and bonds. Commodities such as oats provide traders with a way to diversify and reduce the overall risk of their portfolios.

Should I Invest in Oats?

Oats are a cereal grain that compete for demand with the other cereal grains. Consumer preferences for one grain over another largely depend on price. As a result, the prices of many of the cereal grains are highly correlated with one another.

On the other hand, grain prices are often negatively correlated with other agricultural commodities such as livestock.

Therefore, traders wanting to hedge their bets might want to invest in a basket of commodities that includes grains and livestock as well as metals, energy and other commodities.

Investing in a basket of commodities that includes oats and other commodities can mitigate risk and diversify the composition of assets in a portfolio.

A basket of commodities can also provide protection against inflation and protect a trader from the volatility of movements in individual commodities.

Including oats in this basket may make sense for the following reasons:

  1. Emerging Market Growth: China, India and Brazil are among the many fast-growing countries that will have enormous food needs in the years ahead. As these countries increase their meat consumption, their demand for oats may grow.
  2. Climate Change: Global warming is a positive catalyst for oat prices. Lower crop yields from droughts and excessive heat could boost the price of all agricultural commodities including oats.
  3. Health Concerns: Oats are an extremely healthy grain. Demand could benefit as a response to the global obesity epidemic.

However, traders should also consider the risks of investing in oats:

  1. A global economic slowdown could reduce demand for oats.
  2. A sustained drop in the price of other grains could siphon demand away from oats. While, usually, such price drops are temporary, there is no guarantee that this will be the case in the future.
  3. Overproduction of oats could cause prices to slump.

What Do the Experts Think About Oats?

Oats Experts

Experts are generally optimistic about oat prices. They cite the drought conditions in the northern plains states as a factor that could limit the supply of wheat. One analyst believes these poor weather conditions should impact oat production as well.

Oats has basically the same growing patterns, same fundamentals as spring wheat. It’s a bullish commodity.

– Brian Hoops, president and senior market analyst at Midwest Market Solutions

How Can I Invest in Oats?

Investors have a limited number of ways to invest in oats:

Oats Trading Methods Compared

Method of InvestingComplexity Rating (1 = easy, 5 = hard)Storage Costs?Security Costs?Expiration Dates?Management Costs?

Leverage?

Regulated Exchange?
Oats Futures5NNYNYY
Oats Options5NNYNYY
Oats CFDs3NNNNYY

Oats Futures

The Chicago Mercantile Exchange (CME) offers a contract on oats that settles into 5,000 bushels or about 86 metric tons of oats.

The contract trades globally on the CME Globex electronic trading platform and has expiration months of March, May, July, September and December.

Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the contracts are physically settled by delivery of oats.

Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.

Oats Options on Futures

The CME offers an options contract on oats futures.

Options are also a derivative instrument that employs leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.

Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of oats futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in oats futures to profit from their trades.

Oats ETFs

These financial instruments trade as shares on exchanges in the same way that stocks do. There is no ETF that offers pure-play exposure to oat prices. However, several ETFs invest generally in the grains sector:

3 Leading Grain ETFs

iPath Dow Jones –UBS Grains ETNMLCX Grains ETNiPath Pure Beta Grains ETN

Other ETFs such as PowerShares DB Agriculture Fund (NYSEARCA: DBA) and UBS ETRACS CMCI Agriculture Total Return ETN (NYSEARCA: UAG) invest generally in agricultural commodities.

Shares of Oats Companies

There are no public companies that are a pure-play investment in oats. However, traders that want exposure to oats prices may want to consider buying shares in large agribusinesses that provide seeds, fertilizers and pesticides to farmers:

CompanyCurrent PriceDescriptionExchangeFoundedEmployeesInteresting Fact
Monsanto
Global agricultural company that provides seeds, genomic and other products to farmers.New York (NYSE)190120,500In 1983, Monsanto was one of four organizations who introduced genes to plants.
The Mosaic Company
Global agricultural company that sells crop nutrients to farmers.New York (NYSE)20048,000Mosaic is the United States' largest producer of phosphate fertilizer and potash.
Nutrien
Nutrien Ltd Logo
Global agricultural company that sells fertilizer and feed products.New York (NYSE)19755,700Nutrien was formed in January 2018 after the Potash Corporation of Saskatchewan and Agrium merged.

CFDs

A popular way to invest in oats is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of oats. The value of a CFD is the difference between the price of oats at the time of purchase and its current price.

Illustrative prices only. CFD Service. 80.6% lose money.

Some regulated brokers worldwide offer CFDs on oats. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that trader can have exposure to oats prices without having to purchase shares, ETFs, futures or options.

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