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Wednesday, October 27, 2021

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Oat-Killing Drought Signals Inflation for Breakfast Staples – Crain’s Chicago Business

(Bloomberg) — A drought struck North America’s oat fields this season, and farmers are harvesting such a small crop that prices have risen to record highs, signaling inflation for breakfast staples like oatmeal and trendy alternative milk.

Severe hot and dry weather probably slashed oat production by nearly half to an 11-year low in Canada, the world’s biggest exporter. Similarly in the U.S., one of the world’s top consumers of the grain, the harvest will be the smallest ever. The result is all-time high costs that will likely filter down to consumers.

The situation for North American farmers was so dire in the summer that many cut their losses and harvested damaged plants to be sold as feed for animals. That means even less will be available for making popular foods like granola bars and Cheerios, the No. 1 cold cereal in the U.S.

“You can’t make a Cheerio out of barley,” said Randy Strychar, president of Ag Commodity Research and Oatinformation.com.

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While major food companies haven’t announced price increases related to oat products yet, the higher costs for the grain can only add to the food inflation that’s been rampant this year. Global food prices recently touched a decade high, according to a United Nations index, while oat futures on Friday climbed as much as 2.1% to reach an all-time high of $6.36 a bushel. 

The oat has a humble history as a staid breakfast choice in the form of oatmeal or cereal. But more recently it’s become a trendy darling of millennials. Food companies targeting younger, affluent consumers are billing it as an accessible superfood. Environmentalists tout it as a key crop for reducing carbon emissions in agriculture. It has shaken up the market for alternative dairy products, with U.S. oat milk sales rising nearly 70-fold since 2017. It now accounts for 16% of non-dairy milk sales, more than soy, rice and coconut milk combined and second only to almond milk, NielsenIQ data show. 

To ensure supplies, oat-milk maker Oatly Group AB scoured the globe for reserves, and has netted contracts in the Baltics and other countries in addition to Canada. It’s enough for the Sweden-based company to increase production and sales over the next year as planned, which helps offset the higher oat prices. Oat costs account for less than 10% of global retail sales, the company said in a statement. In August, Oatly projected revenue will surge 64% in 2021. The company wouldn’t comment on pricing.

As for Cheerios cereal—which, coincidentally, is celebrating its 80th anniversary this year by using its original name, CheeriOats—General Mills was able to secure enough North American oats to maintain volume of its ultra-important brand, thanks to its scale and “longstanding relationships,” said Jon Nudi, president of North American retail at the company. 

“Oats are a really important ingredient for us, Cheerios is our biggest brand in the cereal category,” Nudi said. While, like other packaged food makers, General Mills has raised prices across categories, Nudi didn’t commit to raising prices on Cheerios in particular, saying that oat costs are just one piece of overall inflation.

While giants like General Mills and Oatly were able to get their oats, there isn’t a lot to go around. Joe Ennen, chief executive officer of SunOpta, a major supplier of oat milk, in a statement likened the “challenging” supply environment to the shortage of computer chips that’s been throwing the electronics and automobile industries into turmoil. Food companies are scrambling for supplies, and Canadian exports will be down sharply this year, said Chuck Penner, president of LeftField Commodity Research in Winnipeg, Manitoba.

Normally when prices shoot up for a commodity, it incentivizes farmers to grow more the following season and relieve supply shortfalls. However, there’s no guarantee that will happen for oats. The drought has hurt many other crops, so there’s competition, said Lawrence Klusa, president of Winnipeg-based advisory firm Seges Markets. Canola, flax, lentils, durum wheat and mustard are also fetching steep prices and could see increased Canadian acres next year instead of oats. 

“Everyone is trying to get their needs covered before the oats run out,” Penner said. “It’s a bit of a panic situation right now.”

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