Is Crude Oil Undervalued or is Corn Expensive?
The historic collapse in crude oil is one of the reasons why corn prices are trading at their lowest point in a decade along with the major slump in feeding margins as plummeting energy prices are seen shuttering at least half of U.S. ethanol production.
The relation between ethanol and gasoline ties both corn and crude oil together as there have been a number of times over the past 15 years where the correlation between the two has been quite high.
This graphic plots the crude oil-corn price ratio along with the long-term average and plus and minus one standard deviation lines on the left hand axis while on the right hand axis is the moving one year correlation between spot crude oil prices and spot corn values.
The price ratio recently reached a low of 1.74 when the May 2020 crude oil contract expired but as of 4/23/20 is trading at 5.63, by far the lowest of the past 15 years, and indicates that crude oil is cheap relative to corn or corn is expensive relative to where crude oil is trading.
This may have more relevance when the correlation between the two is high where up until recently that is not the case.
Nonetheless, with crude oil currently priced at $18.00 per barrel, the average ratio of 17.34 implies corn should be trading for $1.03 per bushel.
Conversely, holding corn steady at its current price of $3.20 per bushel implies crude trading at $55.91 per barrel at the average ratio.
The bottom line shows while crude oil and corn no longer have a very close price correlation, it does seem that crude oil is undervalued vs. corn, or corn expensive vis-à-vis crude oil based on historical relationships.
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