🥣 Your Guide To Investing In Oats, Another Important Cereal Grain Commodity Used As Food & As An Ingredient In Cosmetic Production

Brief Background

When you think of oats, you might think of plain porridge. While you’re not wrong, there’s a lot more to oats than that. Oat millers process harvested oats to produce a bunch of different product types, like flakes, flour, bran, and more, all of which can be used to create a diverse range of nutritious food products (like granola oat bars), allowing the global oats market to continue to grow. Furthermore, you might be surprised to know that oats have inherent antioxidant, anti-inflammatory, and a number of other properties. This means that oats are used in various personal care products like lotions, creams, and soaps, to act as a cleanser, moisturiser, skin protectant, and as a soothing & anti-inflammatory agent. More about this here.

What Can It Do For You

🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Adding oats to your portfolio means owning an asset that tends to act differently to other asset classes, and even to other commodities. Furthermore, oats can act as a hedge against inflation & a weak US dollar. When the economy undergoes inflationary periods, food commodity prices could rise in response to these conditions.

💰 Profit. As you can see from the price chart below, oat prices can certainly undergo periods of volatility, which can provide opportunities for the more speculative traders and investors. As a grain commodity substitute, oat prices tend to follow other grain prices, especially corn. As an example, if the price of corn rises too high because of its use as a biofuel, farmers can switch to oats to feed their livestock. Bear in mind that there are other factors that affect its price. In the long-term, there are a number of trends that could support oat prices. These include: climate change (which has the potential to impact supply), the development of an innovative range oat-based food products, and changing consumer preferences due to increasing health consciousness. However, there are also a number of risks that could put downward pressure on oat prices. These include: potential overproduction in supply due to rising prices, potentially lowered demand due to a weakened global economy, as well as the availability of other substitutes, both in terms its use as livestock feed (like other grains), or as a health food for people (like quinoa, brown rice, barley, etc.).

Price chart of an oats futures contract over the years
Price chart of the oats futures contract (blue) vs. corn (orange). Notice how price movements are similar.

What Affects Oat Prices

There are several key factors that are involved in moving the price of oats:

  • 🇪🇺🇷🇺🇨🇦 EU, Russian & Canadian Production. The EU collectively produces roughly ~37% of the world’s oats. Russia and Canada, in joint second place, produces roughly the same amount, producing roughly ~18% each. So, all three produce roughly 72% of the world’s oats. Though unlikely, any drastic changes in production in these countries has the potential to affect prices.
  • 🇪🇺🇷🇺 Global Demand (Especially EU & Russia). Although the oats market is a global one, the EU and Russia are the biggest consumer of the grain, accounting for roughly ~52% of the world’s oat consumption. It’s likely that the increasing population of health-conscious consumers in the countries of the EU are driving much of this demand and production.
  • 🏛️Government Policy. Things like subsidies and trade policies can definitely have an impact on oats prices. Any changes to oat subsidies can certainly affect production as farmers change their production strategies in response to these subsidies.
  • 📈 Stock Levels. Stock levels can certainly play a part in moving prices as it can be a key indicator on supply and/or demand levels, which can then lead to speculation in the market. In recent years, demand has exceeded supply consistently, and stocks levels have certainly dwindled, though production numbers have started to recover, with stock levels being replenished, according to the most recent USDA report.
  • ☀️ Weather/Climate Change. As with other agricultural commodities, climate change (like prolonged drought periods and excess rain) has the potential to impact production. That being said, this is somewhat mitigated by the fact that oat production is global.
  • 🔄 Substitution. Oats basically competes with other grains as livestock feed (such as corn), as well as other health foods for us humans (such as quinoa, barley, brown rice, etc.). That being said, oat prices are closely correlated to corn prices, and traders and investors compare the two to determine which is cheaper/more expensive.
  • 🏥 Health Benefits. Oats are known to have numerous benefits on human health. As more research and awareness about oat’s benefits become known, this could further drive demand.
  • 👅 Consumer Preferences & Trends. As consumers become more health-conscious and aware of health foods, demand for oats and oat-based products may increase.
  • 🔬 Research & Development. Research and development into innovative oat-based products could certainly boost demand, as we’ve seen with the likes of oat milk and granola bars. Furthermore, oat-based cosmetics certainly represents an untapped market potential. Developments in this can certainly boost consumer demand.
World oats production and consumption over the years. The EU is a big producer and consumer of oats.
World oats stock levels over the years.
World oats imports and exports over the years. While the EU is a big producer and consumer, Canada is the biggest exporter, while the US is the biggest importer.

What Is It Used For?

There are actually several products that can be produced from processing harvested oats. Oat millers can create a variety of whole oat bran, flour, and flake products to suit the needs of the consumer. Here are some of its uses:

  • 🥣 Food. As mentioned above, oats come in a variety of products, from flour, to flake, to bran, all of which can be used to make a number of dishes, including porridge, baked goods, cereal products, and even beer.
  • 🐄 Livestock Feed. Like a number of other cereal grain commodities, oats are also used as a source of livestock feed.
  • 🧴 Cosmetic Products. Believe it or not, oats have inherent properties that allows it to be used to treat a number of skin conditions, like acne, redness, irritation, psoriasis, etc. So, oats are being used in a number of skin care products, like lotions, creams, face masks, soaps, etc.
According to Expert Market Research, the global oats market is dominated by its food use, followed closely by feed for livestock.

The Case Against Oats

There are a couple of risks involved if you want to get involved with oats. Firstly, although climate change can certainly cause damage to production and supply, this issue itself is somewhat mitigated by the fact that oat production is global. Secondly, there is a potential risk of overproduction due to rising prices in recent years. Big oats producers may want to cash in on rising prices and increase supply in the market, which would then put downward pressure on prices. Thirdly, as a grain commodity, the humble oat has some serious competition due to the availability of other substitutes, both in terms of its use as livestock feed (i.e. other grains), and as a health food for people (i.e. quinoa, brown rice, barley, etc.). These substitutes can certainly dampen the oats market. Last but not least, oats produce a range of health foods, some of which may be considered a discretionary consumer product. A weakened global economy could result in lowered demand for oats, putting downward pressure on prices.

The Case For Oats

As a grain commodity, oat prices tend to follow other grain prices, especially corn. This is because one of its main uses is to livestock feed. So, it pretty much competes as a grain substitute. That being said, there are other factors that affect its price. In the long-term, there are a number of trends that could support oat prices. Firstly, as with other agricultural commodities, climate change (like prolonged drought) can have an impact on supply. Another trend is the development of an innovative and diverse range of oat-based food products (such as oat-based milk and granola bars), which is expected to further boost global market demand. Similarly, the development of the oat-based food products have, in part, been fuelled by changing consumer preferences, particularly in western nations, increasing demand for health and convenience food products. In fact, the leading oat product type is the classic breakfast oat flakes. As consumers become more and more health conscious, oat prices could certainly benefit from this trend.

Popular Ways To Invest In Oats — Pros/Cons of Each

Like some of the other agricultural commodities, you can’t really invest in physical oats. Here are some of the more popular ways instead. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.

  • Oats ETNs. Unfortunately, there are no ETF/ETNs that focus solely on oats, but there are ETNs that invests in a range of commodities (some with themes, like grains), including oats. Because of this, on occasion, there may be times when the actual price of oats & the price of the ETN may differ since they don’t just track oats prices. Regardless, they’re traded on stock exchanges, so they’re pretty easy to buy and sell. Depending on which broker you go with, you may be charged with trading commissions. ETNs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Just be aware that since it’s an ETN, you are essentially buying a bond, an IOU, a debt note, and not in actual, physical oats. Be sure to read the fine print & understand the risks and costs involved.
  • Oats Stocks. Unfortunately, there are no public companies that solely focus on producing oats, but there are large public companies with business activities related to multiple grain commodities, including oats. Because of this, you aren’t directly following oats prices since there are other factors at play. As always, you may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what products & assets they have, what research & development they’re currently conducting, and potential expansion plans.
  • Oats Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell oats at a specified time in the future with an agreed-upon price. A standard contract deals with 5,000 bushels of it! These futures contracts are settled with physical delivery after the contracts have expired. Because you are using a significant amount of borrowed money, even small price changes in oats can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.

TL;DR — Is It The Right Investment For You?

As always, it depends on what your aims are. As a cereal grain crop that’s used to feed livestock, people, and is used in various cosmetic products, oats can be used as a hedge against inflation & for portfolio diversification. As mentioned above, the nutritious and versatile properties of oats means that not only can it be used as livestock feed, but it can also be used to create a number of innovative oat-based food products that can satisfy every-changing consumer preferences. Increasing numbers of health-conscious consumers could certainly boost demand for the nutritious grain, particularly due to the diverse range of oat-based products that are available out there.

However, there is a potential risk of overproduction by big suppliers due to rising prices in recent years, which would put downward pressure on prices. Furthermore, the oat has many other substitutes, both in terms of its use as livestock feed (i.e. other grains), and as a health food for people (i.e. quinoa, brown rice, barley, etc.). These substitutes can certainly take away from oat’s market share and lower demand. Last but not least, oats produce a range of health foods, some of which may be considered a discretionary consumer product. A weakened global economy could result in lowered demand for oats, putting downward pressure on prices.

🧺 If you are considering adding oats to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your oats position so you can take advantage of any volatility in the market.

💰 If you are considering adding oats for speculation and profit, you may want to monitor the factors that affect oat prices mentioned above. You may also want to keep track of monthly reports of world production, consumption & stock levels released by the USDA, so you can keep track of supply & demand. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on oat’s price chart to help consolidate trends and patterns to help with your decision That being said, its prices can also swing unexpectedly and dramatically, so be prepared and have an exit plan in place. It’s also worth noting that traders and investors compare oat and corn prices to determine which is historically cheap, and which is historically expensive. This can act as somewhat of an indicator, similar to how you would compare the stock price of two similar companies to determine if it’s a good investment.

As always, if you are unsure, check in with a professional financial advisor before making any moves.

Thank you for reading! Let us know if you found this helpful. You can connect with us @VNewsletters, or check out our website for more information @ vaultcomms.com.

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