Todd's Take

Saudi Arabia Takes Down Corn

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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The DTN National Corn Index of cash prices held above $3.50 a bushel until this week, pressured by a steep drop in oil and gasoline prices that pulled May ethanol to its lowest close on record Wednesday. (DTN ProphetX chart)

Talk about unintended consequences. As bad as the global spread of the coronavirus has become, putting economic activity at a standstill while we all try to function six feet away from each other, it is fair to say few anticipated how the next bearish shoe would drop on corn prices.

As estimates of world economic growth were cut, OPEC and non-OPEC oil producers were expected to cut production in response to the slowdown that the spread of coronavirus was sure to produce, but that is not what happened. Russia refused to play nice with the others, prompting Saudi Arabia to inform customers on Saturday, March 7, it was cutting oil prices by $6 to $8 per barrel.

Initially, Saudi Arabia said it would raise production to 10 million barrels per day (bpd), but as the Wall Street Journal (WSJ) later reported, Saudi Aramco received instructions to increase production capacity to 13 million bpd -- a bold move, suggesting preparation for an all-out price war ("Saudis Plan to Increase Oil Production Capacity in Price War With Russia," by Benoit Faucon, Summer Said and David Hodari. https://www.wsj.com/…).

On March 9, the first Monday of trading after Saudi's surprise announcement, May crude oil fell over $10 to $31.47 per barrel and has been sliding lower since, reaching $20.83 on Wednesday, over $43.00 below this year's high. The RBOB gasoline market also went into free fall as the May contract ended at 64.59 cents Wednesday, the lowest spot close since 2002.

Both prices rebounded higher Thursday, but the bearish reasons are still in place. Saudi Arabia is a long way from the cornfields of Iowa, but with ethanol accounting for 39% of corn demand, it did not take long for the bearish impact of Saudi's decision to be felt. Spot ethanol fell to a new one-year low on March 9 and closed at an all-time low of 95.20 cents on Wednesday.

To its credit, DTN's national index of cash corn prices tried to resist bearish pressures from both the coronavirus and Saudi Arabia's ill-timed decision, but on Monday, March 16, corn prices fell to a new three-month low and the rout was on. Thursday's close at $3.25 is down 55 cents from this year's high and comes at a time when corn prices don't typically see this much bearish pressure.

One of the odd things about Saudi Arabia's decision is that it doesn't have much benefit for anyone, including Saudi Arabia. Other OPEC members aren't pleased at the lower prices and are urging further talks. According to the WSJ article cited above, Iraq is OPEC's second largest oil producer and needs $59 a barrel to fund its public budget.

A more recent WSJ article by Timothy Puko on Thursday (https://www.wsj.com/…) reported President Donald Trump is considering asking Saudi Arabia to return to its lower production levels. In addition to the threat to the ethanol industry, dozens of U.S. energy companies face bankruptcy at these rock-bottom prices so there is plenty of incentive for the U.S. to broker a deal.

For much of the past two years, farm interests and the oil lobby have been at odds over the subject of small refinery exemptions, which in total have not been so small. On this topic, farmers, ethanol producers and oil companies are in similar boats. U.S. agriculture does not need more demand stripped away after nearly two years of tariff battles with China, the crop disasters of 2019, and now, the spread of the coronavirus.

Let's hope for all our sakes, the administration convinces Saudi Arabia to reverse course and promote a healthier price for the entire oil market. In the long run, a balanced energy market is good for almost everyone and discourages the wasteful consumption that accompanies low prices.

Sometimes, large sums of money are needed for aid, but here is a case where a dose of reason and a little diplomatic leverage could do wonders for many. Given the extra hurdles of the past two years and now the challenge of the coronavirus and all its tentacles, farmers could use the extra help.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman

(BAS/CZ)

Todd Hultman