By David Dutkewych
“Yes mom, I finished my oatmeal”, was a common response in my house as a kid. For some reason I always had trouble getting my oatmeal down as a kid, even on the coldest of cold winter morning in Upstate New York.
Luckily, for me, I don’t have to ask my kids the same question my mom did. They love their oatmeal, even on balmy mornings in South Florida.
It’s not just my family, I see coworkers eating a bowl almost every day. Oatmeal or oats in general have been consumed by people for thousands of years. In its latest reincarnation oatmeal is considered to be a health food. And oats or products containing oats are now being touted commercially as nutritious.
The discovery of oats’ healthy cholesterol-lowering properties has led to wider appreciation of oats as a food fit for human consumption. And for this reason oats are becoming a bigger part of people’s diets.
But when it comes to eating their oats, we humans don’t hold a candle to animals.
Oats make up about 20% of a horses daily diet. Oats are also regularly fed to cattle. And oats are used in some brands of dog food and chicken feed. About 95% of all oats grown are used as animal feed.
Oat demand dipped a bit as the US economy weakened over the last few years, mainly due to lower demand for feed. But now the US economy is getting back on track and the demand for feed is increasing, especially in Asia where people have been increasing their meat consumption.
As the demand for meat rises, so will the demand for animal feed.
But diet alone (both for animals and humans) isn’t going to drive up oat prices. It’s all about the economics.
And oats is losing the economic battle. How can oats compete against the grains, in demand as feed and food for human consumption on top of being used in bio-fuel production?
The answer is, it can’t. Yet oats have some things going for it. It may be down but it ain’t out. In fact, oats is going to surprise a lot of people this year.
How do you make a low-priced loser like boring horse-feed oats into a winner? By looking beyond the obvious. Farmers don’t particularly like growing oats…and for good reason. Their returns per acre stink.
I’m not going to argue this. All I’m saying is that oats can’t sink much further than where it is right now…as a crop that no one wants to grow. This is the bottom. And when you’ve hit bottom, you have only one way to go.
Up.
I’m going to tell you how oats will be making the most impressive comeback of all the agricultural commodities this year…how nobody sees this coming…and how betting against a clueless herd can make you some serious money. So here goes…
How Low Can Oats Go?
With all this demand gearing up, why are oats prices still low? Here are a few reasons.
- European debt crisis - EU debt situation has become a major concern and focus of commodity markets. Europe has driven many commodity prices lower.
- Weakening global economies – The US economy is showing some signs of life, but China’s economy is slowing. (The extent of China’s slowdown is not that severe in my opinion.)
- A larger supply of “Black Sea” grains – Russia is a large producer of oats and they are able to offer cheaper prices. Their exports are flooding the oats market.
But I believe these low prices won’t last long.
The Worst Returns In the Business
No way else to put it: Oats’ profits stink. Take a look…
The worst return per acre is oats.
Until oats prices increase, farmers will refrain from using more of their land for growing oats.
This is nothing new. Farmers have been cutting their land use away from oats for years. From 1961 to 2009 the world oat area decreased by 57%.
The math is simple. Why plant oats when you can double your profit by planting corn?
The answer? You don’t. Farmers will be planting fewer oats. And, in turn, that will tighten supplies at a time when oat sales are strong. Oat prices will rise as a result.
We will soon have to pay a little more for our morning bowl of oatmeal and oat-bran muffins.
I believe long-term oat prices are heading higher, but now is not the time to jump on board. I believe we will see oat prices remain low or even dip down a bit further through the spring.
Hold off until then and when the time is right, there are several ways to gain exposure to the oats market. The most direct way to invest in oats is by using the futures market at the Chicago Board of Trade (CBOT).
But if you don’t want to deal with the futures markets, you can gain exposure to oats and other agriculture commodities by investing in agriculture exchange traded funds (ETFs), such as: ELEMENTS Rogers International Commodity Agriculture ETN (RJA) or Market Vectors Agribusiness ETF (MOO).
Both of these funds have some exposure to oats among other agriculture commodities and will take advantage of higher future oats and food prices.
So do you agree? Do you think oats prices are heading higher as farmers switch to more profitable crops? Or will depressed demand continue to keep oats prices down?
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