Buying (Going Long) Oats Futures to Profit from a Rise in Oats Prices

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Good for Beginners!
    Free Education + Free Demo Account!
    Get Your Sign-Up Bonus Now!

  • Binomo
    Binomo

    Only For Experienced Traders!

Contents

Buying (Going Long) Oats Futures to Profit from a Rise in Oats Prices

If you are bullish on oats, you can profit from a rise in oats price by taking up a long position in the oats futures market. You can do so by buying (going long) one or more oats futures contracts at a futures exchange.

Example: Long Oats Futures Trade

You decide to go long one near-month CBOT Oats Futures contract at the price of USD 2.0900 per bushel. Since each CBOT Oats Futures contract represents 5000 bushels of oats, the value of the futures contract is USD 10,450. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 1,350 to open the long futures position.

Assuming that a week later, the price of oats rises and correspondingly, the price of oats futures jumps to USD 2.2990 per bushel. Each contract is now worth USD 11,495. So by selling your futures contract now, you can exit your long position in oats futures with a profit of USD 1,045.

Long Oats Futures Strategy: Buy LOW, Sell HIGH
BUY 5000 bushels of oats at USD 2.0900/bu USD 10,450
SELL 5000 bushels of oats at USD 2.2990/bu USD 11,495
Profit USD 1,045
Investment (Initial Margin) USD 1,350
Return on Investment 77.4074%

Margin Requirements & Leverage

In the examples shown above, although oats prices have moved by only 10%, the ROI generated is 77.4074%. This leverage is made possible by the relatively low margin (approximately 12.9187%) required to control a large amount of oats represented by each contract.

Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.

Learn More About Oats Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Good for Beginners!
    Free Education + Free Demo Account!
    Get Your Sign-Up Bonus Now!

  • Binomo
    Binomo

    Only For Experienced Traders!

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Buying (Going Long) Oats Futures to Profit from a Rise in Oats Prices

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Buying (Going Long) Oats Futures to Profit from a Rise in Oats Prices

We recently gave a recap of 2020 oats prices , but in this FarmLead Insights article, we’re digging into where the oats market is going in 2020.

Given the cross-border reliance that both Canada and the United States have on the oats trade, we will have to assess economic activity in the United States and Canada.

There is growing consensus among economists worldwide that we are seeing a slowdown global economic growth. Canada continues to exhibit characteristics of an economy in the mature phase of the growth cycle. The heavy collapse of Canadian oil prices are only starting to cause ripples throughout the economy. Concretely, it’s starting with lags in energy investment and energy exports. The direct impact to Canadian GDP is a 0.15 percentage point decline in 2020 [ 1 ].

The most significant economic development going into 2020 is the U.S-Mexico-Canada Agreement (USMCA) – essentially a rebranded NAFTA but with notable revisions to the auto sector. [ 2 ] Otherwise, the USMCA contains no major shocks to the cross-border trading landscape.

However, the new deal has a new controversial clause that could hinder efforts for Canada to deal with “non-market” economies – most notably China. The clause requires the USMCA member country to provide notice and information to the other two partners if it plans free trade talks with a “non-market” economy, and gives the other partners the ability to influence the text of such a deal.

The “non-market” clause could prove detrimental to the progress of any notable trade agreements between China and Canada, a significant blow to Canadian exporters looking to expand into the largest consumer market in Asia.

In terms of interest rates, further hikes are anticipated in 2020. The Bank of Canada has cited that the neutral range is between 2.50% to 3.50%. A stronger Canadian Dollar would, in turn, negatively affect the attractiveness of Canadian grain exports.

For the U.S., the Federal Reserve just raised interest rates for the fourth time in 2020, despite some signals that the American economy is softening. As such, the Fed indicated in their December minutes that a more “patient approach” to raising interest rates would be taken in 2020. GDP growth in the country could reach 2.3%, but the growth (if any) would not be sustainable beyond the calendar year. [ 3 ]

From a currency perspective, oil prices will continue to weigh on the Canadian Dollar in the first half of 2020. Thereafter, the uncertainty of the Canadian federal election will likely push the Loonie lower, possibly into the 71 or 70 cents level.

Historically-speaking, there’s almost always a depreciation of the a developed country’s currency when it’s not exactly clear who is going to be leading the nation. In taking stock of today’s current political environment, a Liberal majority government in Canada will not be repeated in the October 2020 federal election.

For the U.S. Dollar, there are some economic headwinds that the currency is facing. That being said, the U.S. Federal Reserve and Chinese-U.S. trade relations are likely going to be the biggest factors for the Greenback in 2020.

Looking globally, there are significant risks to markets going in to 2020. Top of mind is a potential re-escalation of US-China trade, followed by spillover effects that would hit East Asian economies. In Europe, risks from Brexit and populism continue to weight on the outlook.

North American Oats Demand

Looking at 2020, the direction of the oats market will largely come down to demand and buyer activity from the U.S. According to Statistics Canada, Canada exported 1.47 MMT of oats to the U.S in 2020/18. This is down 2.4% compared to the previous marketing year.

Looking at the first 3 months of the 2020/19 marketing year (August to October), Canadian oats exports totaled 574,526 MT, up nearly 16% compared to the same period last year. A significant portion of the gain on exports is due to new shipments to Mexico.

Based on AAFC’s latest principal crop outlook forecast released last week, 2020/19 oat exports is currently pegged at 2.5 MMT. If achieved, this would be a 6.4% increase year-over-year.

The United States is estimated to have harvested 815,000 MT of oats this past growing season, which would be up nearly 14% compared to the 2020/18 crop. With a significantly larger supply, we could see weakend demand for Canadian oats in the United States, which would definitely put a damper on 2020 oat prices.

USDA’s Oats Market Forecasts

In November, the USDA released their annual long-term agricultural projections up to 2028 for major U.S crops. Specific to the oats market, planted acres is expected to gradually decline over the next decade, down 7% to 2.5 million acres by 2028/29.

Despite the decline in acreage, oat yields are expected to increase 7% to 69.4 bushels per acre by 2028/29 compared to 2020/19 levels.

The net effect to total U.S oats production is an increase of 11% to 62 million bushels (or roughly 1 MMT) by 2028/29. U.S carryout is expected to observe record lows over the next decade, dropping nearly 57% to 23 million bushels (400,000 MT) in 2028/29.

In terms of farmgate values, oat prices in 2028/29 are estimated at $3.00 USD per bushel ($3.93 CAD per bushel), up 11% compared to the average price estimated for 2020/19 of $2.70 USD per bushel ($3.54 CAD per bushel).

According to the USDA, the profitability for an American farmer growing oats is expected to increase 22% to an average of $60 USD per acre by 2028/29. This is a healthy jump from today’s average profit of $49 USD per acre.

Global Oats Demand

The European Union remains the largest producer of oats in 2020/19, topping Russia and Canada. In terms of the international oats trade, the main players include the U.S, Canada, and Australia. Everybody else is quite irrelevant as their supplies are mainly used for domestic consumption.

In terms of oat exports, Australia is the largest competitor to Canada, with Australia shipping an average of 357,000 MT annually. However, due to drought affecting a significant portion of Australia’s oats growing region, oat exports for the 2020/19 crop year are expected to plummet to 250,000 MT, down 54% compared to the previous year.

Canada is expected to make up for the lost volume and export a total of 1.6 MMT in 2020/19, slightly less than the volume in 2020/18.

One important note to consider, is that most of Australia’s oat exports go to China, where a free-trade agreement exists between both countries. However, there is no such agreement in place between Canada and China. Thus, in order for Canada to replace Australia’s lost export volume, a deal must be in place.

Canada Needs China’s Oats Market

In the past 5 years, Chinese oats imports have grown at a rapid annual rate of more than 28%. In other words, in each of the past 5 years, imports have jumped by a third more than the previous year.

Demand for breakfast cereal in China is growing due to urbanization and the accelerated adoption of Western consumption habits. As a result, China has become the second-largest importer of oats, just behind the U.S.

In November, Canada sent high-level trade ministers to China in order to build up a stronger trade relationship. At the conclusion of their meetings, the Canadian government said that they’re aiming to double agricultural exports to China by 2025. This effort will require significant coordination between both countries.

Specific to oats , the crop has faced significant non-tariff trade barriers when shipping to China due to the absence of specific phytosanitary protocols. Currently, only Canadian seed oats and processed oat products are able to enter China.

According to POGA, a work plan between the CFIA and China plant health (AQSIQ) authorities regarding oats is in discussion as of this year. However, the time frame is still as of this day unknown, and this is the major problem.

However, as mentioned above, a souring of Canada-China relations occurred during the last quarter of 2020, namely, the inclusion of a ‘non-market’ clause in the USMCA, and the high-profile arrest of Huawei’s CFO on Canadian soil – as instructed by the United States. The arrest has caused tremendous tension in China-Canada relations.

Based on China’s December forecast, the country is expected to import a total of 150,000 MT in 2020/19, down 70% compared to the previous year. It’s also a massive 250,000 MT decline from the November forecast! If observed, this will be the least amount of oats imported by China since 2020/15.

Ultimately, the main cause for China’s low exports this year is due to the situation in Australia. Because Canada does not have an established trade agreement with China, Canada is yet to make entry into the Chinese market.

Thinking About 2020/20 Oats Acres

In 2020/19, the global harvested area of oats came in at 23.3 million acres. This is down slightly from 2020/18 levels of 23.5 million acres.

Breaking it down, here is how harvested acres looked in 2020/19 for the top 5 oats-producing countries and how much that was up or down compared to the previous year:

  • Australia: -13.5% to 1.58 million acres
  • Canada: -4.9% to 2.47 million acres
  • European Union: -1% to 6.58 million acres
  • Russia: -1% to 6.79 million acres
  • United States: +8% to 864,500 acres

Global ending stocks of oats in 2020/19 is expected to decline 2.6% to 2.71 MMT compared to 2020/18 levels. What the oats market is really factoring in though is that ending stocks are at the lowest level since 2020/13.

So what should the oats market expect for 2020? Based on significant weather events driving global oats production downwards in the 2020 harvest season, you could easily argue that global 2020 acreage could be the same or slightly higher than 2020/19.

As usual, there will likely be much speculation heading into the 2020/20 planting season. The rise in oat prices in late 2020 should buy more acreage in the upcoming seeding campaign, especially when producers are looking for any sort of ROI in the depressed state of the pulse and durum markets. As a result, we are betting that planted oats acres will increase in 2020/20. [ 4 ] However (and as usual) the oats market will only start to slowly price this in.

Specific to Canada, we anticipate oats acreage could increase by about 10% from the 3.05 million seed in the spring of 2020, to something closer to 3.5 million. This would mirror the Canadian seeded area of oats seen in the 2020/16 crop year.

When Should You Sell Oats in 2020?

For 2020, there are a few bearish as well as a few bullish factors that could affect the oats market. So what does this mean for your selling strategy?

Despite the recent volatility observed on the Chicago futures board, cash oats prices are expected to look stable throughout the winter months and rise in spring/summer when supply becomes increasingly tight.

Average prices for oats in Western Canada is still hovering at around $3.00 CAD per bushel ($2.24 USD per bushel).

With latest forecasts suggesting that China will import 70% less oats this year compared to 2020/18, it will be interesting to see whether oats from other countries (namely Canada) find their way into the Chinese market. However, as of writing, latest economic forecasts do not anticipate new trade flows between China and Canada to initiate. As mentioned though, the Chinese market continues to present that largest amount of opportunity for the oats market.

Despite forecasts calling for dwindling oats supply as the 2020/19 crop year draws closer, bullish sentiment will likely not be as prominent as observed in the 4th quarter of 2020. As a result, we should be conservative on any significant upside potential for new crop oat prices.

A tighter North American balance sheet will create the best opportunity to see a price rally in the oats market. However, any price rally would likely be short lived – given the uncertain economic outlook for 2020, it could result in countries buying less goods – including oats.

Additionally, the U.S. Dollar – Canadian Dollar relationship will need to be closely monitored. With over 90% of Canadian oats exports going to the U.S, changes to the exchange relationship would certainly stall or accelerate trade.

Victor Han is an Ottawa native with a passion for data analysis. After obtaining a degree from the University of Ottawa in Biomedical Science and Business, Victor worked in the food industry as a market analyst. Since switching his attention to agriculture, Victor applies his passion for science and the natural world to grain marketing.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Good for Beginners!
    Free Education + Free Demo Account!
    Get Your Sign-Up Bonus Now!

  • Binomo
    Binomo

    Only For Experienced Traders!

Like this post? Please share to your friends:
Binary Options Trading
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: