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Outside Markets Add to Price Weakness

November 20, 2012
By: Fran Howard, AgWeb.com Contributing Writer
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Corn and soybean prices have been pressured lower by outside markets for months.

With the euro-zone economy now officially in its second recession in four years, the U.S. dollar continues to gain ground against the euro, making U.S. exports of corn and soybeans less competitive on world markets. At the same time, plunging crude oil prices are also weighing on grain and oilseed markets.

On Nov. 15, the European Union’s statistics office announced that gross domestic product (GDP) in the 17-nation euro-zone slipped 0.1% in the third quarter after logging a 0.2% decline in the previous three months.

The same day, the U.S. Energy Information Administration (EIA) announced that weekly U.S. oil inventories rose by 1.1 million barrels for the week ending Nov. 9. A week earlier, the EIA released a relatively bearish outlook for crude oil.

The Recent EIA outlook shows:

  • Hurricane Sandy resulted in the shutdown of two refineries, major petroleum distribution terminals, and pipelines due to power outages and flooding.
  • The West Texas Intermediate (WTI) crude oil price will average $89/barrel in fourth-quarter 2012, which is $4 lower than EIA’s previous-month forecast. Brent crude oil prices are expected to average about $1 less than last month’s forecast at roughly $110/barrel.
  • Next year’s prices will be even lower, with WTI crude oil expected to average $88/barrel and Brent crude at $103 per barrel.

 

Crude oil prices will pressured lower partly due to increased production, both here and abroad, according to EIA. This year, U.S. crude oil production is expected to average 6.3 million barrels per day. Projected production in 2012 is expected to increase to 6.8 million barrels per day, which would be the highest level of production since 1993.

"Lower energy prices are fundamentally bearish," says Michael Swanson, economist with Wells Fargo, Minneapolis. "The dollar and crude oil prices are major fundamental drivers of the grain and oilseed markets."

Both a strengthening dollar and weak global economic growth, which has weighed on crude oil prices, have been pressuring corn and soybean prices lower for some time and likely will continue to be market drivers. However, until the United States enters a more normal interest rate environment or something catastrophic occurs, like war between Israel and the Middle East, the price-changing impact from the dollar and crude oil will be small, says Swanson.

"When the dollar strengthens 3 to 5 percent, it’s negative for commodity exports, but we will need to see a 15 or 20 percent increase in the dollar to see strong changes in corn and soybean prices," Swanson says. "It’s now mostly just random noise."

Gasoline prices will also fall in 2013, according to EIA. Lower gas prices will work to lower the cost-of-production for corn and soybean producers. Since the start of October, the average U.S. price for regular gasoline fell from $3.80 to $3.49/gallon on November 5. While Hurricane Sandy, which contributed to higher wholesale gasoline prices on the East Coast, has clouded the near-term outlook, 2013 prices are expected to fall to $3.44/gallon next year from an average of $3.64 this year.

While natural gas inventories are now at record high levels, prices are expected to increase next year. EIA projects that the Henry Hub natural gas spot price will average $2.77 per million British thermal units (MMBtu) in 2012, rising to $3.49/MMBtu in 2013. Even with the increase, though, prices will remain well below 2011 prices, which averaged $4/MMBtu.

 

Read more about these important outside markets:

All that Glitters--and Gurgles
Gold and crude oil are key markets for insight into grain prices

For More Information
See the latest market quotes with AgWeb's Market Center


 

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