Oats Futures Trading Basics

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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
(Price Quotes)
O 5000 bushels
(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.

Uses of Oats

Oat futures are popular on the commodity market because the grain can be used to make a wide variety of products. Here are some of them:

Steel-cut oats: Also known as Irish oatmeal, steel-cut oats are groats of whole oats that have been cut into two or three pieces.

Whole oat groats: These are oat grains that have been dehulled and treated to denature the enzymes. Their bran layer is still intact, so they are rich in fiber.

Whole oat flour: Made from whole oat grains, whole oat flour has a high protein and fiber content.

Low-bran oat flour: The flour is made with oats whose bran layer has been removed, so it has lower protein and fiber content.

Rolled oats: These are rolled whole oat groats that are cut into various thickness

Instant rolled oats: Quick and instant rolled oats are made from steel cut oat groats.

Baked oat products: Oats are also used in a variety of baked foods, such as oat bread, oatcakes, and oat cookies.

Cosmetic products: Oat extracts have a soothing effect on the skin, so they are used in certain cosmetic products.

The Largest Producers and Consumers of Oats

Oats are grown in the temperate regions of the world. According to the United States Department of Agriculture (USDA), the top producers include the EU-27, Russia, Canada, Australia, the United States, Brazil, China, Belarus, Ukraine, Chile, Argentina, and Kazakhstan. Canada, Australia, the EU, and Russia are the largest exporters.

In terms of consumption, the EU tops the list of oat consumers, followed by Russia, United States, Canada, China, Brazil, Australia, Belarus, Ukraine, Argentina, and Norway. The US is the biggest importer of oats. Other big importers are China, Mexico, Norway, and Japan. Oat futures contracts are the most popular means of trading the commodity.

Why Trade Oats Futures Contracts

Traders have different reasons for playing the oat futures market. To some traders, the market provides opportunities for short-term speculative trading, while to others, the oats market provides a means for portfolio diversification or hedging against inflation. Players in the oat production industry trade oat futures to hedge their price risk.

Speculative trading: The majority of traders in the oat futures market are there for speculative trading. These traders aim to profit from the short-term fluctuations in oat prices.

Diversifying portfolio: Oat futures is one of the popular agricultural commodity futures, which fund managers and investors use to diversify their portfolio away from stocks and bonds. Spreading their investment across many asset classes helps them to reduce the effects of market risk on their portfolio.

Hedging against inflation: The purchasing power of paper money is regularly being eroded, as central banks frequently lower interest rates and print more money. So, some people invest in commodities, such as oats, to protect their wealth from inflation since commodity prices increase when the economy is heated up.

Securing a good price: Oat producers sell oat futures contracts to secure a profitable price for their produce, while merchants and retailers buy the contracts to ensure a stable supply of the commodity.

How to Trade Oats Futures

Oat futures contracts are offered on the Chicago Mercantile Exchange (CME), and they can be traded from any part of the world through the Globex electronic trading platform. One oat futures contract is equivalent to 5,000 bushels (about 86 metric tons) of oats, and the price quotation is in cents per bushel. The minimum price fluctuation is ¼ of a cent per bushel or $12.50 per contract.

The contract normally expires in the months of, March, May, July, September, and December. Trading ends on the business day preceding the 15 th calendar day of the contract month. At expiration, the contract is settled by physical delivery. The last delivery day is the second business day after the last trading day. Traders, who don’t want to take or make delivery of the commodity, can roll over their contracts to the next expiration months.

To start trading oat futures, all you need to do is to create an account with the exchange through your futures broker and deposit the required margin. Since it is a leveraged instrument, you need not have the full dollar worth of the contract before you can trade it. However, you have to be cautious about leveraged instruments — while you can make more money with them, you can also lose more.

Oat Futures Trading Strategies

The oats futures market is a really tough market for most trading strategy designers. The liquidity isn’t that great compared to other more popular markets, which makes slippage a great concern.

However, by putting in enough effort it is possible to find a strategy for this market. Just make sure to account for a lot of slippage!

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Oats Seasonality

Here is a seasonal Chart of the market:

Factors That Affect Oats Futures

There are many factors that affect the pricing of oat futures contracts, which an oat futures trader must watch out for. Here are some of them:

Weather conditions: Though less sensitive to weather situations than wheat, oat production can be affected by weather events. Adverse weather conditions, such as drought or a prolonged freeze, may reduce production and increase oat prices, while ideal weather conditions can boost yield and bring down the price of oats.

The price of competing grains: The price of corn and other competing grains has some effects on oat prices. For quite some time now, oat prices tend to correlate with the price corn.

Demand and supply report: The USDA reports monthly data on the global production, stocks, trades, and consumption of oats. It is important for an oat trader to monitor these data for clues of demand and supply imbalances, which can affect the prices of oat contracts.

Conclusion

Oats are a very nutritious source of food for both humans and animals. The extracts are used in cosmetics for their skin-soothing effects. Oat futures contracts are traded on the CME.

Investing In Oats: What You Should Know About Trading This Commodity

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Last Updated on August 16, 2020

Why Are Oats Valuable?

Oats are a cereal grain with high soluble fiber content. They are a source of food for both humans and animals and an ingredient in the production of cosmetics.

Oats have been growing wild in West Africa since around 12,000 B.C. The first wheat and barley farmers viewed the plant as a weed and a nuisance.

Around 2,000 BC, when wheat farming began in Scandinavia and Poland, farmers observed that oats grew better than wheat in the cold, wet climate of Northern Europe. Nearly 500 years later, farmers in this region began intentionally growing oats. Therefore, oats were one of the last cereal grains to be domesticated.

Today, oat production exceeds 22 million metric tons annually and takes place in diverse countries across the globe. The importance of the crop as both a source of animal feed and a highly nutritious food for humans ensures it will remain a leading global commodity.

How Are Oats Grown?

Oats are a member of the grass family and grow best in cool weather conditions with full sunlight and average, well-drained soil. The crop can tolerate light frosts, but will die when temperatures drop below 5 degrees Fahrenheit.

One of the advantages of growing oats is that the crop does not require intensive maintenance. When planted with other cover crops such as winter peas or winter beans, oats require no additional feeding.

Farmers generally plant oats either in the spring or late summer. Using a broadcast seeding method, they spread the seeds in rows about 3 inches apart.

Oat Plant – Image via Pixabay

The crop goes through several stages of growth before it is ready for harvesting. Oats planted in September will have the following developmental timeline:

Foundation

During the first six months of the plant’s life cycle, three important developments take place:

  1. Root growth – the oat plant produces roots between September and March.
  2. Leaf production – the plant begins leaf production in September and develops its first visible unfolded leaves in November. By December the plant will have developed nine or more unfolded leaves.
  3. Tillering – In December the plant develops its main shoot. By February it develops nine or more tillers.

Construction

The next phase of the crop growth occurs between April and May. Three developments occur:

  1. Stem elongation – The crop’s ears and nodes appear.
  2. Booting – The flag leaf sheaths extend and open.
  3. Ear emergence – The ear emerges above the flag leaf.

Production

Between June and August, the crop completes the final stages before harvesting:

  1. Flowering – the plant begins to flower, which signals the beginning of the harvesting season
  2. Milk development – the grain becomes watery ripe.
  3. Dough stage – the grain accumulates starches and proteins and increases its dry weight
  4. Ripening – the grain hardens and becomes difficult to divide.

Oat harvesting times vary by region. Typically farmers try to time the harvest to occur when the grains have reached 35% moisture – when the green kernels on the plant are beginning to turn a cream color. Harvesting occurs by swathing, or cutting the plants to about 4 inches above the ground. The swathed grains are placed in windows and dried in the sun.

Top 10 Oat Producing Countries

Oats Futures Contract Specifications

Rank Flag Country Oats Produced (Thousand Metric Tons)
#1 European Union 8,073
#2 Russia 5,440
#3 Canada 3,700
#4 Australia 1,100
#5 United States of America 717
#6 Brazil 682
#7 Chile 670
#8 Argentina 660
#9 Belarus 500
#10 Ukraine 481

Oat millers produce several food products from harvested oats:

Top 7 Oat Products

Product Description
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:

  1. High soluble fibers – Oats make you full longer and regulate blood sugar and cholesterol.
  2. Anti-inflammatory properties – Oats have been clinically shown to prevent inflammation and heal dry, itchy skin.
  3. 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:

Supply

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

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:

  1. Inflation Hedge
  2. Bet on Demand Growth
  3. Portfolio Diversification

Inflation Hedge

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.

Portfolio Diversification

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:

  1. 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.
  2. 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.
  3. 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:

  1. A global economic slowdown could reduce demand for oats.
  2. 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.
  3. 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

Leverage? Regulated Exchange? Oats Futures 5 N N Y N Y Y Oats Options 5 N N Y N Y Y Oats CFDs 3 N N N N Y Y

Oats Futures

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.

Oats ETFs

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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