Watching the futures market trade during the past 12 to 18 months has been maddening. The price direction has often not been a reflection of the underlying fundamentals present for various ag commodities, and, many times, the explanation for price moves has been "those outside markets," crude oil in particular.
As 2007 unfolded, it became clear that something other than traditional market fundamentals, such as crop supply and/or demand, was affecting prices. Ag futures were forced to adjust to an influx of hedge fund and index fund activity that added considerable liquidity—and volatility—to the commodity futures trade. That created a new fundamental: money flow among commodity, treasury and equity invest-ments. As the money moved from market to market, it became a major price mover for ag commodities.
As usual, the U.S. dollar is one of the outside markets that many think of in terms of impacting commodity prices. The historical linkage still holds: When the dollar weakens, it is deemed price-positive for U.S. ag commodities because it makes U.S. commodities more competitive; when the dollar rises, it lessens the competitiveness of U.S. grains on the world market and foreign buyers suffer from reduced buying power as their currencies become less valuable against the dollar.
As 2007 continued and 2008 arrived, crude oil emerged as the greater influence on commodity futures trading. Crude oil prices and the impact on corn-for-ethanol demand just scratches the surface of crude's influence on the ag markets. The fact that ethanol is displacing a portion of gasoline has definitely made it more responsive to the vagaries of the crude oil market. Government mandates to use corn-based ethanol (9 billion gallons in 2008; 11.1 billion gallons in 2009, including 0.5 billion gallons of biodiesel and renewable diesel) have made corn in effect an energy crop and not just a feed and food crop.
The influence moved more than just corn futures as soybean and soybean oil futures also seemed in lockstep with crude oil. There, the factor is biodiesel. That too will have a growing mandate via the Energy Independence and Security Act of 2007.
As we move into 2009, however, it looks like corn futures may be able to operate a little more independently of the crude oil market. The first indicator is the ever-growing demand base for corn. Increasing yield potential can only go so far in meeting that demand and, so far, corn has done little to attract more acres in 2009. The acreage "battle" really hasn't reached full steam and may not until early 2009.
The price relationship between corn and soybeans is the swing vote in the acreage debate, but input costs (especially fuel and fertilizer) will also have a say in the final acreage mix. Fluctuating input prices at the end of 2008 prompted some farmers to hold off booking their needs, so acreage plans are not yet cemented for the next growing season.
Going forward, the impact on commodities from oil prices will remain, but its linkage may not be as strong. The downturn that we've seen in commodity prices has tracked the downward plunge in crude oil, but corn was showing signs of independence from crude oil as the market's focus turned to a potentially terrible year of corn exports. In December, USDA esti-mated 2008–09 corn exports at just 1.8 billion bushels. For that expected tally to climb, the dollar must see continued pressure. If a cheaper dollar brightens the corn export outlook, it could help corn divorce itself from crude oil.
Nonetheless, late-2008 pressure on crude oil prices stymied the price recovery in corn and soybean futures.
The factors that have pressured crude oil prices are similar to those in corn. The sour world economy means a decline in U.S. and global oil demand. The downturn in demand prompted OPEC to dramatically lower its output targets, most recently by 2.2 million barrels. Combined with actions taken since September, the cartel has tried to take 4.2 million barrels of crude oil off the market. Oil prices, however, remain on the defensive, largely due to declining economic prospects around the globe.
Contracting world economies are raising concerns about the demand base in foreign markets that has been built for U.S. corn. Soybeans have enjoyed the strong appetite of China, but corn demand is facing a stiff challenge in the 2008–09 marketing year.
Along with slowing economies, feed rations in Asian and European markets that used U.S. corn in 2007–08 are using more wheat in 2008–09. Wheat in many markets around the globe (including in the U.S.) is being priced as feed and not food. When this happens, price sensitive buyers often shift their appetites to wheat and temper their corn buys.
Going forward, corn and soybeans will continue to find their price fortunes linked to crude oil. But fundamental factors are building in both of these ag commodities that will eventually allow them to move more independently of crude. Only a major price move (up or down) in oil would remarry corn with crude.
You can e-mail Roger Bernard at email@example.com.
- January 2009