Oats are a soft agricultural commodity used in meals around the world as well as feeding livestock. Traders can gain exposure to the price changes of this fundamental crop in various ways.
We’ll explain how to trade oats and where you can find a regulated broker in .
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3 Reasons You Might Trade Oats
Traders purchase agricultural commodities such as oats for many reasons, but the most important ones include:
- Inflation Hedge
- Speculate on Demand Growth
- Portfolio Diversification
Speculating on 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.
Speculate 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.
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.
How Can I Trade in Oats?
Traders have a limited number of ways to speculate on the price of oats:
|Method of Investing||Complexity Rating (1 = easy, 5 = hard)||Storage Costs?||Security Costs?||Expiration Dates?||Mgmt. Costs?||Leverage?||Regulated Exchange?|
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.
Trading 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 trade 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.
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 trade generally in the grains sector:
|iPath Dow Jones –UBS Grains ETN||MLCX Grains ETN||iPath Pure Beta Grains ETN|
This screenshot is only an illustration. Current market prices can be found on the broker website.
Other ETFs such as PowerShares DB Agriculture Fund (NYSEARCA: DBA) and UBS ETRACS CMCI Agriculture Total Return ETN (NYSEARCA: UAG) trade generally in agricultural commodities.
Shares of Oats Companies
There are no public companies that are a pure-play trade 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:
Please note, this is an example trade – not a recommendation.
A popular way to trade 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.
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.
Where Can You Trade Oats?
If you are looking to start trading oats and other agricultural commodities, here’s a list of regulated brokers available in to consider.
Top Brokers Available in
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.90%-89.00% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Should I Trade 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 trade in a basket of commodities that includes grains and livestock as well as metals, energy and other commodities.
Trading 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:
- 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.
- 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.
- 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 trading in oats:
- A global economic slowdown could reduce demand for oats.
- 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.
- Overproduction of oats could cause prices to slump.