Fundamentally Speaking

Crude Oil & Ag Commodities Correlations

Joel Karlin
By  Joel Karlin , DTN Contributing Analyst

Most commodity indices remain close to multi-year lows as prices on a wide variety of goods ranging from livestock to metals to softs have tumbled sharply over the past few months.

A severe slowdown in the Chinese economy, the world's largest commodity consuming nation is primarily responsible for this situation though a strong U.S. dollar in the foreign exchange markets has also pressured values.

It is interesting to note that the global equity markets are headed for their worst quarter in over four years with slumping commodity prices often cited as one of the primary culprits.

One key commodity is crude oil and its plunge over the past year has been breath-taking and difficult to fathom in light of prices well north of the $100 per barrel level in recent years.

We were curious what impact falling crude oil prices have had on other commodities, especially the agricultural items.

This piece reports three month, six month, one year and five year correlation coefficients of crude oil vs. a number of grain, oilseed, dairy and livestock contracts.

In the most recent three month period soybean meal has the highest positive correlation at 0.49 with Class IV milk having the highest negative correlation of -0.41 though this has more to do with the surging price of butter than the impact of crude oil.

The six month correlation is interesting in that all the markets have positive correlations with corn, oats, soybean oil and wheat particularly high.

The one year correlation also shows almost all other markets having positive correlations with the milk and livestock markets being very positively correlated with crude oil.

The exception is corn at -0.45 which is strange as falling crude oil prices have pressured ethanol values and slumping ethanol margins ostensibly is negative for corn values.

The five year time span results in positive correlations for all markets except for live and feeder cattle.

It is difficult to make any outright judgements on these correlation coefficients other than to say that some of the factors have contributed to the slump in crude oil: the decline in China's GDP, the possibility of the first U.S. interest rate hike in ten years, ample supplies of most commodities and overall sluggish global economic growth would seem to augur for continued price pressures for the grain, dairy and livestock markets going forward.



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