Crude oil below $50

Farm Forum

01/06/15 — Crude oil prices dropped below $50 in overnight trade, representing a new low in prices and the lowest we’ve seen in years for crude oil prices. The sharply lower crude price comes at a time when other commodities are also starting to struggle a little more.

Last week’s soft market for grains during the Holiday shortened trading is putting traders on edge, as it may represent the recent highs may be in for grains as we’ve rallied nicely in corn and wheat from the October lows. In fact, wheat prices have already retreated almost $1 per bushel from highs made just a few weeks ago. Soybeans have been caught in a trading range for the past few months, and so far have had difficulty moving out of that range.

Some traders are expecting some bullish information in the Jan. 12 USDA report, which will give initial winter wheat planted acreage for 2015 as well as final 2014 corn and soybean yields for the U.S. Some expect significant acreage revisions as well and some fireworks from that information. These market bulls are excited about the recent rally, and expect it to continue through the winter.

However, we might run into some difficulty with that scenario given the strong U.S. dollar and weak crude oil price. The other difficulty might be the strong carryout projections still present in our supply/demand scenarios, with 2 billion bushels still projected in corn and over 400 mb carryout stocks in soybeans still expected. These are large numbers, and in spite of China’s strong export demand for soybeans, still represents a difficult picture for the long run in grains.

The other difficult issue for commodities is the likely end of the strong run in commodity prices that has been with us for the past 8 years. This is similar to the run in commodities from 1972 to 1980, with it mirroring the 2007 through 2015 run higher in commodities. But that run came to an end, and it might be possible that this run higher in commodities will come to an end as well.

There are already some bad signs in the marketplace in crude oil prices (which are now less than half of what they were worth in July), and also the strong rally in the U.S. dollar recently. The run higher in commodities in 1972-1980 was followed up by a setback from 1980 to 1987, when stocks of grains were plentiful and the price of commodities was well below the cost of production for multiple years. That led to the farm financial crises of the 80’s, when high interest rates and 40% land depreciation was common across the Corn Belt. Could we see a repeat of that scenario in the years 2016 to 2022?

In that scenario, we could have a few years of near break-even prices left for us over the next year or so, but thereafter we could see prices retreat even further after more rebuilding of stocks. Already, we’ve seen the price of many grains depreciate considerably from the highs of 2012, when stocks were extremely tight following the drought of 2012 in the U.S.

A rebuilding of stocks in 2014 with our record yielding corn and soybean crops unfortunately have pushed prices back down to near break-even for many producers. Another year like 2014 where production exceeds ‘trend’ yields could be disastrous for producers and for prices. Lets hope a repeat of the 1980 Farm Financial Crises doesn’t appear, as it was indeed a very difficult time for farm country.