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Oats Futures Trading Basics
Oats futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of oats (eg. 5000 bushels) at a predetermined price on a future delivery date.
Oats Futures Exchanges
You can trade Oats futures at Chicago Board of Trade (CBOT).
CBOT Oats futures prices are quoted in dollars and cents per bushel and are traded in lot sizes of 5000 bushels (86 metric tons).
|Exchange & Product Name||Symbol||Contract Size||Initial Margin|
|CBOT Oats Futures
(Full Contract Spec)
|USD 1,350 (approx. 13%)
(Latest Margin Info)
Oats Futures Trading Basics
Consumers and producers of oats can manage oats price risk by purchasing and selling oats futures. Oats producers can employ a short hedge to lock in a selling price for the oats they produce while businesses that require oats can utilize a long hedge to secure a purchase price for the commodity they need.
Oats futures are also traded by speculators who assume the price risk that hedgers try to avoid in return for a chance to profit from favorable oats price movement. Speculators buy oats futures when they believe that oats prices will go up. Conversely, they will sell oats futures when they think that oats prices will fall.
Learn More About Oats Futures & Options Trading
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Oats Futures Guide – Contract Specifications, Charts, Seasonality and Trading Strategies
Oats are cereal grains derived from the seeds of the oat plant. They are not only grown for human consumption — in the form of oatmeal and rolled oats — but also are one of the most common sources of livestock feed.
Wild oats have been growing in the Fertile Crescent of the Near East since about 12,000 BC but were initially seen a weed. They would later become domesticated in the Middle East and Europe during the Bronze Age, making oats one of the last grain crops to be domesticated.
Today, global oat production is more than 26 million tonnes per annum. Due to its importance as a source of human and animal food, oats futures contracts are widely traded on commodity exchanges.
|Oats Futures Contract Specifications|
|Rank||Flag||Country||Oats Produced (Thousand Metric Tons)|
|#5||United States of America||717|
Oat millers produce several food products from harvested oats:
Top 7 Oat Products
|Whole oat groats||Oats 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 flour||Whole oat products that have been ground through hammermills or rollstands|
|Low bran oat flour||Flour produced through bran production that has lower protein and fiber content than whole oat flour|
|Crushed oats||Lightly ground whole groats, steel cut or flakes|
|Large flake rolled oats||Rolled whole oat groats that have been cut into various thicknesses|
|Quick, baby and instant rolled oats||Manufactured 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:
- High soluble fibers – Oats make you full longer and regulate blood sugar and cholesterol.
- Anti-inflammatory properties – Oats have been clinically shown to prevent inflammation and heal dry, itchy skin.
- 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:
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 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 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:
- Inflation Hedge
- Bet on Demand Growth
- Portfolio Diversification
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.
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:
- 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 investing 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.
What Do the Experts Think About Oats?
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
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
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.
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:
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