October 7, 2011 / 3:28 PM / 6 years ago

Shrinking oat stocks may add to rising food costs

<p>Local farmer Pat Hutchinson cuts his oat crop north of Cochrane, October 18, 2002. After Hutchinson combines the crop, about 90 acres, he will complete his harvest for 2002. REUTERS/Patrick Price</p>

WINNIPEG, Manitoba (Reuters) - North American oat stocks look to fall to a near-record low next year, tightening milling supplies used in breakfast cereals such as Cheerios even as food companies struggle to contain input costs.

Relatively high prices of commodities including corn, sugar and cocoa have for the past year left food companies facing the dilemma of whether to absorb the costs or pass them to consumers.

The outlook for thin oat supplies next year and the predictable bounce in prices, however, is due to how relatively cheap the grain is currently.

(Graphic of oat stocks and prices: link.reuters.com/par34s)

Oat prices have tumbled about 18 percent this year and look to strain supplies in two ways.

Their low cost may lift demand from the U.S. horse-feeding industry that is already eager to avoid paying a hefty premium for corn, another feed grain, said oat industry analyst Randy Strychar of Oatinsight.com.

Oats have also lost price ground to canola and wheat -- the two biggest Canadian crops -- and may fall out of favor with farmers deciding in early 2012 what they will plant, he said.

“It doesn’t look good for oats next year,” Strychar said.

Canada is by far the world’s biggest oat exporter, shipping nearly 2 million tonnes annually, and supplies U.S. millers such as General Mills (GIS.N), Quaker Oats (PEP.N) and Ralcorp RAH.N to make cereals, oatmeal and granola bars.

Millers have covered their supply needs through 2011, but next year looks worrisome, said Terry Tyson, grain procurement manager for Grain Millers Inc, which has Canadian and U.S. oat mills that make oat products for food companies.

“In the back of your mind, you’re thinking, ‘It’s going to tighten up’,” Tyson said from Yorkton, Saskatchewan. “That is exactly what we worry about, that (farmers) aren’t going to have the incentive to plant.”

CHEWING THROUGH SUPPLIES

It will not take long for millers and the U.S. horse-feeding industry to chew through supplies after Canadian farmers harvested a third straight small crop this autumn.

But with millers well-stocked for now, oats fell to the biggest discount versus corn in at least three years in late August, before corn prices weakened and narrowed the gap to about US$2.80 per bushel over oats.

Strychar expects North American crop-year ending stocks next summer to fall to 1.419 million tonnes, the smallest in five years. Canadian stocks are seen tumbling to 750,000 tonnes, according to the federal agriculture department.

Cash and futures prices have not yet risen to reflect next year’s supply worries, but thin stocks would eventually push up prices right through the supply chain, Tyson said.

“If higher prices persist, then prices on the shelf go up.”

General Mills raised breakfast cereal prices in November last year and food companies in general have kept a close eye on rising commodity costs, said Erin Lash, an analyst at Morningstar Inc in Chicago who follows the food industry.

Food companies hedge costs and buy much of their inputs through forward purchases, blunting some of the impact when prices rise.

But at some point, food companies recoup higher costs by raising retail prices, trimming expenses or reducing how much product goes into a package, Lash said.

“They have several weapons in their arsenal when it comes to offsetting commodity costs. They can raise prices, but that’s something they try to avoid doing.”

Commodity prices have eased in the past month on jitters about the global economy, but it is unclear whether that trend will last long enough to ease costs for food companies, Lash said.

Much depends on how large a crop western Canadian farmers plant in 2012, and there’s a new variable to consider.

The Canadian government plans to dismantle the Canadian Wheat Board’s marketing monopoly over western wheat and barley starting with the 2012/13 crop -- which farmers plant in spring.

An open market may make those grains more attractive to farmers than oats, Strychar said, but others said it is unclear how the marketing change will factor into the planting mix.

Editing by Dale Hudson and Bob Burgdorfer

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