04-17-2012: May Oats: Much Better Weather in 2012-2013
Our recommendations generally tend to agree with Barchart's technical indicators "Opinion" for most commodities. Oats is a glaring exception, howvever, as we are getting a very strong sell reading when Barchart is giving a buy signal. Common sense dictates that oats are coming down from highs achieved during an exceptionally bad weather year, but this year weather is good. Moreover, production is expected to be up worldwide for oats. The one fly in the ointment might be rising crude oil prices due to Mideast tensions (and even they are moderating). That would cause increased use of grains for ethanol production, driving up the cost of corn and oats with it. Oats may soon return to the "sleepy state" it has enjoyed in the past (indicated by high/low spreads on charts declining rapidly) as oats 'a plenty seem to be on the horizon worldwide.
We fed oats, corn, and soybeans into a neural network to get the following result:
May Oats:
May Oats:
The U.S. oats trading outlook is favorable for continued expansion of grain trade among the three NAFTA partners, the U.S., Canada, and Mexico. The oats market has benefited in many ways from NAFTA and Canadian oats are welcomed by U.S. processors, who utilize the product to shore up domestic oats deficits. U.S. oats production has declined dramatically to about 1.5 million acres over the years due to competition for acres from other crops, and now meets just 2/3 of domestic consumption needs. U.S. oats traders and growers need to be aware of crop conditions in Canada and how changes in the value of the Canadian Dollar relative to the U.S. Dollar might affect pricing in the oats market. Oats pricing tends to run in line with corn, due to its use as a feed grain. Major oats producers are in the upper midwest, although Texas is also a large oats producer. The Eurex added OAT futures this month, but "OAT" stands for "Obligations Assimilables du Tresor" related to French sovereign debt bonds, not oat futures. We added this note to eliminate confusion. In 2010, the usually sleepy oats market became the hottest grain globally. There were worries then about a short crop in Canada, the largest supplier of U.S. oats imports. During one week the oats market was up 40%. The Canadian Wheat Board said that Canada faced its worst rain-related planting cuts in grain areas in nearly 40 years. Canada grows about 15% of the world's oats, with Russia and Europe producing 55%, but Canada supplies about 81% of global oat exports. Last year, one third of the anticipated 1.4 million oat acres in Canada did not get planted. This year, weather is much more conducive to the planting process. Warmer weather is allowing some early planting of grain crops and freezing temperatures in the Great Plains and Midwest did not damage crops there. Both Europe and America have better weather, warmer, with beneficial rains. Australian crops are also reported to be in good condition. Russia's grain production this year is going to be 6% below last year's. Irish sowings are ahead of schedule. For the first time in 70 years, Canada's wheat and barley markets will be operating in an open-market environment due to the Canadian Wheat Board losing its single-desk authority band beginning its transition to a commercial entity. Economics and crop rotations will be deciding factors for Canadian farmers this spring, as uncertainty around what will happen in the new marketing environment allows grain companies to be slow to offer contracts. Barley and oats production in Canada is expected to rise due to a return to more normal levels of summer fallow. Oats production is forecast at 3.6 million metric tonnes, up 16% and 18% over the previous year's levels, respectively. Strong corn prices and weather conditions will result in a 5% increase in corn production in Ontario and Quebec. Export levels are forecast to rise about 4% over 2011-2012 levels and marginally above 5-year average levels. Much of recent news suggests a negative effect on oat pricing to us. The fact that oats are coming down off of weather-related highs and increased production worldwide provide a double reason for being a bit bearish.
440.0I R 4/13
I CBT - May-12 Oats, 5000 bu., c/bu Cm.=0.60 Lim.=39.0
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Our computer says a non-conventional reactive interpretation of point-and-figure chart signals works best for Oats. Therefore, the above chart is taken as giving a sell signal.
We are headed toward a cyclical high and a seasonal up period.
Our best-performing internal program is "WilderRT." It is giving a buy signal.
Results of "WilderRT" for Oats (blue lines = successful trades, red, unsuccessful): (Always in the market.)
Our third system has triggered a sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)
The point value is $50. Initial margin on a single contract is $1,620. Use of options is advised.
Scale trade sellers are entering the market for the long term in this price range.
In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Commercials with the best track record are getting increasingly-short.
The average volatility shown below suggests that a major change in direction to down is imminent at a volatility low point.
Our option trade recommendation is to sell the Oats May 320 Call @ 22-1/4 or better.
What the May - Dec. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down. The best time to enter or leave the above spread is when it is at +4.00 or narrower buying the far as prices are rising and then seling the near, and exiting or entering when it is at -7.000 or wider selling the far as prices are falling and then buying the near.
Here's an intraday chart for the previous day ( 11/29 ).
Risk Versus Opportunity Report
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OK2 May Oats
High Price: 340.5
Current Price: 327.7
Low Price: 302.2
Risk: -0.080
Opportunity: -0.159
(O/R) Ratio = 1.992
| Factors | Weighted Points |
|---|---|
| Inter-Market Analysis | + 1 |
| Parabolic Chart | - 1 |
| Nirvana Chart | - 1 |
| News | - 1 |
| Point & Figure | - 1 |
| Cyclicals | + 1 |
| Seasonals | + 1 |
| Internal System 1 | - 1 |
| Internal System 2 | 0 |
| Third System | - 1 |
| Historic Range | - 1 |
| Commitment of Traders | - 1 |
| Range/Volatility | - 1 |
| Level Table | - 1 |
| Other Factors | + 1 |
| Total | - 6 |
Place 9 December Oats on a Sell Watch with stoploss @ +21-1/2 above the get-in point._____________________________________________________________________________________________________________________________W.G.
