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Oats: From the Original Energy Contract to Trendy Dairy Alternative
Emily Balsamo, CME Group
AT A GLANCE
- Recent consumer popularity has raised the oats profile in the United States, which is the world’s largest importer of the crop.
- Oats futures have been in place since 1877, and briefly matched corn prices during a 2021 rally.
Oats are a crop whose history in North America is inextricably linked with the futures industry. Launched in 1877 along with Corn and Wheat by the Chicago Board of Trade, Oat futures can be considered the first energy derivative: the underlying crop served as feed for the city’s horses before the advent of the internal combustion engine.
In the United States, domestic disappearance of oats due to human consumption surpassed that of animal feed only in the last decade, as interest in the crop for food has strengthened. Oats are grown without genetic modification, require less chemical management than other grains, and demand minimal processing before being fit for retail sale. Generally viewed as a natural and heart-healthy food (thanks to a famous marketing push in the late 20th century), oats find a place within in the American diet as consumers seek foods with minimal processing and short ingredient lists. Additionally, the rise of oat milk among dairy alternatives contributes to current demand.
The United States is expected to produce 837,000 metric tons of oats in the 2022/2023 crop year, or 3.6% of global production, up from only 578,000 metric tons and 2.7% of global production in 2021/2022. The world’s top oat-producing countries of the past decade are the European Union, Russia, Canada, and Australia before the United States. Finland is the world’s largest consumer of oats per capita: muesli, consisting primarily of rolled oats, is a Nordic dietary staple.
The United States is the world’s largest importer of oats, consuming almost 10% of the world’s supply. Almost all oats imported to the United States come from Canada, the world’s largest exporter and a heavy consumer of the crop.
Late 2021 experienced a rally in oat prices, with front-month futures prices exceeding Corn futures prices and hovering above $6 per bushel for most of Q4 2021. Oat futures prices remained high in Q1 2022 before approaching pre-rally levels mid-year. Since mid-2022, front-month Oat futures stabilized around $4 per bushel, declining further in late 2022 and early 2023.
Oat milk, which has become increasingly ubiquitous in both coffee shops and home fridges, experienced an increase in retail sales of over 50% in the year ending June 2022, according to point-of-sale data. This figure underlies the transition of oats in the United States as primarily a feed crop, to one consumed by humans. Only 7% of domestic disappearance of oats was attributable to food, alcohol and industrial use in the 1975/76 crop year. In 2017/18 and in each marketing year since, domestic disappearance attributable to food, alcohol and industrial use surpassed domestic disappearance attributable to feed and residual use. Although some differences in quality standards exist between milling and feed-grade oats, the same fundamentals underlie both markets, and the same producers are generally capable of growing both. Some producers have looked to the guidance of local millers to make the transition.
On the supply side, the 2021 oats rally was supported by relatively low production in both Canada and the United States on the back of lower planted acreage and dry growing conditions. Drought in Canada’s oat-growing regions in 2021 sent yield per harvested acre to 2.39 MT/hectacre (HA) in 2021/22, down from 3.48 in 2020/21 and rebounding to 3.54 in 2022/23, according to the USDA. In 2021/22, only 1.2 million HA were harvested for oats in Canada, compared to more than 1.3 million HA in 2020/21 and 2022/23. The United States experienced an even more extreme dip in area harvested last year: from 408,000 HA in 2020/21, to 263,000 HA in 2021/22, with a partial recovery in the current marketing year at 360,000 HA.
Dampened supply in an atmosphere of sustained demand lifted oats prices and upset the historical relationship between the crop and other grains last year. The corn-oats spread, the difference between corn and oats front-month futures prices, inverted in late 2021, while the wheat-oats spread (Chicago SRW Wheat minus Oats futures) neared zero. The adage “oats know where the corn goes” proved true in late 2021, when a corn rally followed the oats rally.
Oats Resurgence in the Cornbelt?
While high prices made oats more attractive for oat growers, the inversion of the corn-oat spread would not necessarily make oats more profitable than corn for farmers, all else equal, because corn per acre yields significantly more than do oats (especially in 2021; above). Still, advantageous pricing may encourage the use of oats as a cover crop in U.S. regions historically growing corn and soybeans, as supported by both groups touting regenerative agriculture and the oat-milk industry.
The current crop year is a mixed one for oats. Rebounding from low production and drought, Canada and the United States are anticipated to be producing more oats in 2022/23 than in the year prior. Crop conditions have been varied, though show a marked improvement from 2021 across North America. Demand remains robust, though some predict interest in dairy alternatives to be plateauing. A boon for American farmers; oats will be eligible for USDA revenue protection, a form of crop insurance, in 2023. Prior to the change announced in November 2022, the USDA offered only yield risk for oat farmers; price risk management is now available.
Oats and the Future of Agriculture
Although oats are eclipsed in acreage and production many times over by corn, wheat, and soybeans; the markets of recent years may belie a bullish future for the crop.
Naturally nitrogen-friendly and relatively resistant to plant and insect pests, oats could play an important role in the future of agriculture, were regenerative soil practices to become widespread. The crop gives a 1-2 punch of environmentalism in its nutritional profile, which can be part of a high-protein diet without reliance on dairy and livestock. Oats for animal feed, though declining in relative prevalence, remains a major application for the crop.
For more than 145 years, the Chicago Board of Trade has been the primary venue for hedging price risk associated with oats. Learn more about Oats futures.