Granola lovers beware: Oat costs jump as Canada output drops



(Bloomberg) -- Granola and oatmeal lovers in the U.S. may need to prepare for some sticker shock.

Oat production in Canada, the world's biggest exporter, is set to plunge after rain and snow delayed harvests across the Prairie Provinces. Because the crop spent too much time in wet fields, grain quality declined, which means more will end up as livestock feed and less will be suitable for making food products like Cheerios breakfast cereal.

Since the end of September, when the extent of the damage began to emerge, prices have rebounded from a seven-year low, staging the biggest harvest-season rally in a decade. More than 90 percent of Canada's oat exports are sent to the U.S., where companies including General Mills Inc. and Quaker Oats Co. use them in everything from snack bars to cereals.

"You can't make a Cheerio out of barley," said Randy Strychar, the president of Oatinformation.com, an industry researcher based in Vancouver. "It's going to be tight."

Production will drop 13 percent to 2.976 million metric tons after lingering harvest delays, Agriculture and Agri-Food Canada said Nov. 17. Strychar says the decline may be as 20 percent because farmers were so far behind the normal pace of harvesting.

As of Nov. 21, farmers in Saskatchewan still hadn't collected 6 percent of their crop, according to the province's agriculture ministry. Alberta had 27 percent unharvested as of Nov. 15, data from the provincial government show. A year earlier, the oat harvest was mostly completed by early November.

To see why grain markets may rebound from lows in 2016, click here.

Oat futures on the Chicago Board of Trade were up 25 percent from the end of September through Nov. 24, the biggest rally for the period since 2006. Before the harvest delays, prices on Sept. 13 touched $1.71 a bushel, the lowest since February 2009. The most active futures contract closed Wednesday at $2.23 1/4.

Canada oat exports will drop to a four-year low of 1.5 million tons in the year that began Oct. 1, down from 1.6 million tons a year earlier, the U.S. Department of Agriculture estimates. American food processors are dependent upon Canadian supply because U.S. farmers don't grow enough, which means they import about 57 percent of what they use.

General Mills, the Minneapolis-based company that makes products including Nature Valley granola bars and Cheerios cereal, declined to comment. Chicago-based Quaker Oats, a unit of PepsiCo Inc. that produces its eponymous hot cereals and granola bars, didn't respond to a request for comment.

 

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Even if farmers managed to complete the harvest this week, the grain won't be usable for foodmakers. The U.S. may have to import more from northern Europe and draw down existing inventories to manage the supply rout, according to Strychar at oatinformation.com.

It may take a few months before oat buyers start to see higher costs because supplies had been ample from earlier harvests and prices were low, said Dave Sanders, a Vancouver, Washington-based vice president for Cereal Byproducts Co. The company, which gets about 80 percent of its oats from Canada, markets 10,000 tons annually for use by food makers and producers of pet food.

"After the first of the year, we'll start seeing some increases," Sanders said. "It will be a significant change in the market. There is still a lot of oats being stored on-farm from last year's crop. That will temper the price a little bit."

While oat inventories in the U.S. Midwest may be as high as 21 million bushels -- enough to last five months -- not all of it is food-grade quality, so millers may try to purchase more to make sure they don't run out, said Ryan McKnight, a merchandising manager at Linear Grain Inc., a Carman, Manitoba-based company that originates, stores and transports crops.

"Mills ran out in 2014, and they don't want that to happen again," McKnight said.

 

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Ceres Global Ag Corp., a Toronto-based owner of agricultural assets, said Nov. 9 that the harvest delays created "significant quality issues" and price volatility. The company, in an earnings statement, said it will focus on increasing the volume of grain sold.

In the U.S., the oat crop was collected earlier and generally had better quality, said Frayne Olson, an agricultural economist at North Dakota State University in Fargo. Still, because American food makers rely more on imports than domestic supply, getting quality oats may fetch a premium, he said.

It's not clear how much of the Canadian crop will be usable in food, the USDA said in a Nov. 2 report. The department lowered its forecast for Canadian oat inventories in 2016-17 to 765,000 tons from 795,000 tons, according to the report.

Canada's crop will be key for American food companies because most other oat-producing countries consume most of what they grow, said Tregg Cronin, a South Dakota-based analyst for Halo Commodity Co. Food and seed demand, accounting for about half of U.S. use, is "inelastic," he said. And makers of horse feed, another big source of demand, aren't likely to switch to other grains.

"We rely on them for so much of our imports," Cronin said of Canadian farmers. "That's what makes this such a big problem."


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