Corn and crude oil have a lot in common, and not just because more than one in three bushels of the 2016 crop will be used to make ethanol. The two commodities share seasonal trends – and investors. Both are causing concern right now.
A big drop in crude inventories last week barely registered on crude futures Wednesday, leaving them below $50 a barrel. The key is what was done with that crude.
Less of it was exported, in the form of either crude or products like gasoline and diesel, even though refineries gobbled up more to ramp up production of both fuels. That was good news for farmers on the expense side of their income statements: Diesel costs are down more than a dime per gallon off highs from earlier in April. Midwest refineries ratcheted up operating levels to 95.7% of capacity, increasing diesel output to its highest level of the year in the region, building supplies at a time when agricultural demand can drain tanks.
But the gasoline surplus is also on the rise. In terms of the number of days’ supply, stocks are at the largest level for the end of April since 1999.
This is a key factor in the petroleum complex, where, as with corn, summer can be crucial. Demand for gasoline is strongest during the summer driving season, but the increase sent prices down more than 2% after the report.
Ethanol prices moved lower too, faced with their own bearish news. Production dropped last week, and is running 6.4% below the weekly record set in March. The amount of corn used for the biofuel still appears on track to top USDA’s current estimate for the 2016 crop. But weaker ethanol prices can lower profit margins at plants. Margins improved last week, but only because corn prices lowered the cost of the plants’ feedstock. Ethanol stocks increased as well,
Basis in the diesel market between ULSD futures settled in New York Harbor and Midwest benchmark cash prices has flattened, a sign seasonal buying by dealers is beginning to weaken. That should support opportunities to buy fall diesel this summer, if the energy market can avoid major disruptions.
That’s never easy for a market filled with emotions and fundamentals. U.S. crude production continues to rise, and it appears OPEC and its allies are already exceeding commitments to curtail what they’re pumping. Trouble spots around the world where oil is produced could always spur rallies; shocks to financial markets from elections in France, Britain and Germany could likewise present buying opportunities. A break in crude oil to $45 isn’t out of the question this summer, which would also be a chance to lock in fuel for drying crops this fall.
Propane followed crude lower, falling around 6.5 cents a gallon from April highs. Growers following my recommendations already booked 50% of their anticipated drying needs when prices were lower in March. Further weakness is a chance to get caught up to that level while waiting to see how the summer energy market plays out.
The flow of money, not just fuel, could decide the issue. While investors have been dumping agricultural commodities like corn, they started buying crude oil again recently. If funds turn bearish on energy too, it will at least make help make fuel for farmers more affordable.
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Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Adviser. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.