Crude oil woes and crop prices

Crude oil prices are now about half of what they were just 7 months ago, with the highs the week of June 23rd at $107.42 on the weekly nearby chart, and now futures are trading at just over $53 today. That is a huge price decline in a short period of time. One would think that the rapid decline in energy prices would have a large impact on other commodities as well. But that has not been the case so far.

The week of June 23rd corn prices traded from $4.52-4.58, dropping to $3.18 the week of October 1 before rallying to near $4.10 today. So since October 1, the corn market has rallied while the crude oil market has dropped considerably. Of course, corn fundamentals are different than crude oil, but with corn now an energy provider producing ethanol, it is interesting that corn rallied nearly $1 while crude oil prices were crumbling lower from October 1 forward.

But perhaps one needs to put prices into a larger historical framework to understand why prices are doing what they are doing, and why some commodities have rallied (grains) while crude oil has crumbled since October 1. After all, corn came down from the all time highs in 2012 and were cut by nearly 63% into the lows on October 1, 2014. So perhaps they needed to rally from these pitiful price levels???

To review, corn prices have had their fluctuations the last 3 years. We peaked the week of 8/10/12 at $8.43, only to run down to $4.06 by the week of Jan. 10, 2014. We rallied into the week of May 9, 2014, topping out at $5.23 before dropping lower into about October 1 and bottoming at $3.18. We’ve rallied from there to $4.10 this week, a decent rally indeed on the futures, and even better on cash markets with basis improvement.

Wheat prices are up from a low of $4.75 to end September to $6.30+ today. Our recent highs occurred in 2012 for wheat at $9.47 the end of July, with prices dropping by Jan 2013 to $7.40. They dropped to $6.05 by Jan 2014 and then rallied to $7.22 by May, only to suffer the setback to near $4.75 by September 2014 – only to rally back to near $6.70 before dropping to $6.09 today.

Soybeans have a similar pattern, as we went from a poor crop in 2012 (and price highs of $17.89 in September 2012) to drop down to $11.86 in August 2013, only to rally back to $15.36 by May of 2014. From there it was all downhill into October of this year, with prices trading at lows of $9.04 to start October. We’ve rallied back to

above $10.50 a number of times in November and December, a decent rally indeed from the lows.

But how long can grains rally while crude oil continues to suffer lower and lower prices??? While fundamentals of the grain market are important determinants of the overall value of grains, they cannot operate in a vacuum separate from the other commodities. The pull of lower and lower energy prices eventually could pull other commodities lower, but not until the rest of the supply/demand fundamentals stabilize. In other words, as long as the supply/demand fundamentals continue to improve for grains (think demand), then grain prices can continue to rise. But once the grain fundamentals stabilize, if crude keeps dropping eventually that will become a drag on other commodities as well.

Who knows, perhaps crude will rally from the current cheap price of $53??? That might be the hope of outside commodity bulls who would like to see the rallies continue. But all other things equal, cheap crude oil does not help the cause of higher commodity prices in whole.