Corn and crude oil have, at times, been best friends, joined at the hip. You couldn't talk about one without the other. But crude oil's meltdown -- it's down from more than $90 a barrel in June 2014 to a shade above $30 today -- did more than just lower farmers fuel costs. It highlighted how broken the correlation to corn has become.
Chris Narayanan is an agriculture commodities analyst at Societe Generale, a French bank that with a variety of clients including grain companies. He told me the story to be written here isn't about the breakup. It's about "the resiliency of the ag complex fundamentals. Even though they can't completely get away from outside markets, like crude oil, there are individual stories in corn, soybeans and wheat that have far greater impact on pricing than what's going on in the oil market. Oil is a double-edged sword. Yes, it pushes the commodities sector down, but it also lowers the cost of the production. That helps."
There's a lot of corn out there, and while prices may still be below many producers' breakeven, it's not totally in the dumps either. Narayanan noted futures prices have rebounded about 20 cents from December lows, and he thinks downside risk to corn prices is fairly minimal.
"I can't think of anything unless there is a big global meltdown again that would cause another leg down in prices," he said. "I'm not saying we'll rally, but we'll stabilize at this level. The next rally would either be on evidence of increased demand or, more likely, some kind of supply shock."
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As I’m sure DTN Senior Analyst Darin Newsom will mention in this Friday's column (which will focus on corn and the crude oil markets), both markets are facing the same problem. Supplies have grown despite low prices.
The only way Newsom sees corn prices going up is if noncommercial, or speculative, traders buy back into the markets. They've accumulated pretty large net-short position, but gave it a pretty good haircut last week when noncommercial traders trimmed their net-long position by more than 25,000 contracts. So maybe there's some change afoot. Newsom does see potential for a late-winter rally in the corn market.
I stumbled across an interesting article in the Wall Street Journal today, called "Where Have All the Oil Speculators Gone?" It was more of a diatribe against liberal politicians who wanted the government to intervene in the oil market when prices were high than an analysis of speculative positions. Yet the headline is telling. Where have all the speculators gone?
They've gone short.
Speculative traders' net-long position dropped by more than half, from around 450,000 contracts in the summer of 2014 to about 179,000 last week.
Are the two markets married, moving in lockstep? No. Some of the same forces are at work in each. The fundamental supply problem may even, at its core, be the same.
"I think the fundamentals of each individual commodity is far more important than, is a far bigger driver than what's going on in the crude market," Narayanan said. "That just gives you added pressure, but it's not the cause."
(Here's a link to the WSJ article: http://on.wsj.com/…)
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