Canada Markets

Oat Futures Ignore Market Weakness

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The December oat contract is poised to generate weekly gains for the third consecutive week, with current trade near a test of trendline resistance at $3.47 per bushel. The middle study indicates current momentum is to the upside, while the lower study reflects the continuous spread between the two nearby contracts which indicates a nearby bullish inversion which has strengthened since mid-June. (DTN graphic by Nick Scalise)

The attached December weekly chart indicates that the oat market seems poised to print a third consecutive higher weekly close this week, posting gains in an environment where other grains and oilseeds are under pressure while also defying the strengthening U.S. dollar.

Since the week of Feb. 24 when the December oat contract reached its recent high of $3.61 3/4/bu, the oat contract has fallen 22 cents/bu or 6.2%, while the December corn contract has fallen $1.04/bu or 22% and the December hard red spring contract has fallen 54 cents or 8%.

Underlying support in the market stems from a combination of concerns surrounding crop quality along with ongoing freight issues experienced on both sides of the U.S. border.

North Dakota's recent crop report suggested that while the crop is near the average growth stage as of the Aug. 17, only 15% was harvested as compared to the five-year average of 36%. The crop was rated at 89% good to excellent. Manitoba's most recent crop report indicates some oats coming off in the central region of the province, although also suggested that recent heat has resulted in some crop turning fast, which can lead to lower test weights and yields. Saskatchewan's data as of July 28 indicated the province's oat crop at 71% G/E, down from 86% last year, while Alberta's Aug. 12 crop report pegged the province's crop at 75.6% G/E, down from last year's 88.2%.

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While Thursday's Statistics Canada report will substantially reduce this year's yield potential from last year and will also reflect acres lost to earlier flooding, current forecasts from the U.S. National Weather Service suggest areas of southeast Saskatchewan, western Manitoba and western North Dakota may see up to 5 inches of rain in the next five days, which may delay harvest and impact quality.

As seen on the attached chart, the December oat contract is trading within a symmetrical chart pattern, although the weekly chart has posted gains over the past two weeks and is poised to close not only higher but also closer to the upper resistance line. This resistance is currently found at $3.47/bu while the 2014 high of $3.61 3/4 remains just above this level.

The middle study represents the contract's weekly momentum indicators, which shows the secondary trend has turned higher. The lower study represents the continuous spread, or the spread between the continuous weekly close and its subsequent contract. While this spread has widened this week (in this case the Sept/Dec spread), it remains in a bullish inverse and has trended in this direction since mid-June. This is an indication of a bullish sentiment among commercial traders.

While not seen on the chart, noncommercial traders or investors are also increasing their bullish stance in the market, having extended the size of their net-long position over the last two weeks to 2,041 contracts as of the latest CFTC data for Aug. 12, up from a low of 1,514 contracts earlier in the month and the largest net-long position held in five weeks.

Two other signals to watch are the crop's seasonal tendency and the open interest in the nearby contract. Over the 2009 through 2013 period, the December oat contract has trended higher from late August/early September lows through to the contract expiry in mid-December in three out of five years. The average of the five years would suggest an 8.3% increase from the week of Sept. 1 through to mid-December expiry.

A further sign of potential market strength is seen in increased interest in the nearby September contract. Tuesday's open interest in the September contract was indicated at 912 contracts, is up from 374 contracts a year earlier, a sign of increased interest in early trade.

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

Follow Cliff Jamieson on Twitter @CliffJamieson

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