Dichotomies

12/16/14 — We have a dichotomy developing in the commodities sector, with grains rallying since October and crude oil dropping precipitously during that time. It is an odd mix of price signals, with grains flashing bullish signs, but crude oil and energy prices flowing rapidly lower. Odd bedfellows, indeed!

Since October 1, crude oil prices have dropped from $90/barrel to under $55, a huge $35 drop which came after crude prices had already dropped from about $105 earlier in the year. During the same 2-month time frame, corn prices have rallied from $3.30 to just under $4.10 on the March contract, a rally of 80c or almost 25%!

So much for the link between corn prices and energy prices! Or perhaps that link is just broken for now, and it will reappear later this year? After all, almost 40% of the corn use is ethanol use now in the supply/demand balance sheet, and surely ethanol demand will be impacted by the energy sector. On one hand, the 10% blend wall might be peeled back with more demand on fuel use at lower prices. But on the other hand, prices of ethanol obviously can be affected to the downside as well as oil prices. So this is not a game that can continue much longer, with crude oil prices crumbling and corn prices rising.

Another commodity that is showing its ugly side is feeder cattle, with prices plunging lower the past 4 days with limit down moves into Tuesday, December 16. Prices have now dropped from their highs of just under $239 to $119 in just the month of December alone. That 10% break might very well represent the top in feeder cattle prices for years to come – a bad development for cattle in the long run.

The break in feeder cattle may be indicating that higher corn prices cannot be tolerated at current feeder cattle prices, and that since feed prices continue to rise, the feeder cattle price could not. So the lower feeder cattle prices might also be a drag on corn prices as well – we just can’t keep pounding corn higher with sharply lower energy and feeder cattle prices.

Weekly export inspections Monday, Dec. 15 were poor corn at only .546 mmt, strong soybeans at 1.82 mmt, and poor wheat at only .386 mmt. Overall, that should have supported soybeans and pressured corn and wheat yesterday. Instead, wheat continued to rally strongly and continued that trend overnight due to a very weak dollar Tuesday morning.

SAM weather forecasts took some rain out of the 8-14 day forecast today in northern Brazil and southern Argentina – which could be cause for some concern as we head into Jan. 1 (what is like July 1 in the U.S.). However, the next 7 days still continue to suggest plentiful rainfall for most of Brazil and northern Argentina, while southern Argentina looks a bit dry. Temps the next 14 days look cooler than normal to normal.

U.S. weather 14-day forecasts Tuesday, Dec. 15, took much of the precip out of the 14 day forecast, keeping it relatively dry for the next 14 days. Temps remain above normal for the next 7 days before cooling in the 8-14 day forecast.

Pro Ag looks for grains to languish in the area of $9 to $10.50 the rest of the winter for soybeans, and $3.20-$4 for corn as well. Pro Ag recommends a storage hedge in corn at $4.05 July futures or higher. We worry about the price direction of commodities now that crude oil and feeder cattle have both tipped over.