The 800-mile-long Trans Alaska Pipeline System that starts in Prudhoe Bay on Alaska’s North Slope and runs to the state’s port city of Valdez was shut down after the Alyeska Pipeline Service Co. located a leak Saturday in a pumping station. As of early Tuesday morning, the pipeline, which transports an estimated 12 to 15% of U.S. crude oil production, was still closed with no estimate as to when it would reopen. Uncertainty sent crude oil prices up more than 2% Monday and set off speculation whether it would impact corn prices and thus corn planting.
"I would be shocked if the pipeline were closed more than two weeks," says Jack Hunter, risk management consultant with FCStone, Kansas City. "If it restarts by the weekend, the price impact will just be a blip on the screen." A longer-term supply disruption, however, could have a much larger impact on crude oil prices, thus ethanol prices, and consequently corn prices. "The longer the shutdown goes on, the more impact it will have," adds Hunter.
Corn Runs on Oil. Whether a price spike in crude prices that occurs from shutting down the pipeline spills into the corn market will depend on the magnitude of oil’s price response. "The stronger the move in oil, the more likely corn prices will move higher in sympathy," says Chad Hart, Iowa State University economist.
Some analysts think an extended shutdown of the pipeline could send corn prices high enough to entice growers to plant more corn than they would have. In 2007, when crude oil and corn prices spiked, soybean and wheat prices stayed relatively steady. "Acreage that year shifted dramatically into corn," says Hart. For the 2007-08 crop year, 93.5 million acres were planted to corn. With cotton, wheat, and soybean prices also strong this year, Hart doubts rising oil prices alone would be enough to shift a substantial number of acres into corn.
"There’s a very strong correlation between crude oil prices and gasoline prices and a strong correlation between ethanol and gasoline prices," says Frayne Olson, ag economist with North Dakota State University. When gasoline prices are low, federal and state ethanol mandates drive ethanol prices, but the average U.S. gas price was over $3/gallon in late December, according to the U.S. Department of Energy, and energy prices are driving ethanol prices. Thus any spike in gasoline prices could pull even more corn into ethanol production, where margins are already strong.
Impact on Inputs. Fertilizer prices could also trend higher if crude oil and other energy prices strengthen. Fertilizer, particularly nitrogen, for this crop year is already in the pipeline, notes Olson, and many growers have already locked in their fertilizer costs. If they haven’t, Olsen advises them to do it before prices head much higher.
The shutdown of the Trans Alaska Pipeline System is only one of several supply disruptions that have occurred in the oil market over the past several weeks, says Hunter. "For the past month, the headline risk has been bullish."