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Crude Oil Uncertainty Might Not Boost Crop Commodities

ICE Futures Canada canola contracts saw another volatile week during the period ended Feb. 25, with the global political and economic uncertainty, brought on by the turmoil in Libya and other countries, triggering a speculative sell off in many commodity markets – including canola. The fundamentals are still fairly supportive, and the drop in prices encouraged some end-user pricing which helped canola recover off its lows for the week.

Going forward, damage to the charts has occurred, which could lead to some additional speculative selling in the weeks ahead. However, the recent volatility had little, if anything, to do with the actual supply/demand issues facing canola. Those supply/demand factors remain supportive, with a strong domestic crush pace, solid export demand and the need to buy enough acres this spring expected to underpin values.

The story in the U.S. was much the same, with soybeans, corn, and wheat all posting limit-down declines at one point during the week, only to bounce off those lows to end back roughly around where they started in corn and beans, but still down in wheat.

The initial selling pressure was tied up with risk aversion, as the mounting unrest in North Africa and the Middle East had nervous speculators backing away from grain and oilseeds in favour of safer bets.

Soybean and corn supplies remain tight, which will keep those two markets locked in their fight for acres going forward.

The U.S. Department of Agriculture forecast U.S. farmers will plant 92 million acres of corn in 2011, a 4.3 per cent increase on the year, harvesting a record 13.73-billion-bushel crop. However, even with that record crop, projected U.S. ending stocks of 865 million bushels would still be on the tight side below a billion bushels. In addition, the planting intentions may not translate into large yields and the tight supply situation will keep a lot of attention focused on the weather.

U.S. soybean area is also expected to increase by about half a million acres to 78 million acres in 2011. Potential U.S. soybean production was being pegged at 3.345 billion bushels by USDA.

OIL’S RISING TIDE

Gains in crude oil during the week, which climbed as high as US$103 per barrel at one point before edging back below that $100 mark, would have normally spilled over to pull the grains and oilseeds up as well. However, that wasn’t the case this time around, given the economic uncertainty that went along with the advancing crude oil. On the one hand, the rising tide should lift all boats, and a rally in crude oil can be expected to translate to increases in other commodities as well. However, on the other hand, higher energy costs could slow the global financial recovery, reducing the demand and the means to buy those other commodities.

Movements in the price of oil will dictate where the grains and oilseeds go, and depending on the day and the speculative sentiments the correlation will either be direct or at an inverse.

How much oil is used growing a crop? It adds up. Obviously there’s the fuel for tractors and combines. In addition, the grain and oilseeds grown in the middle of the Prairies need to be trucked to the elevator, railed to the ports and eventually shipped across the ocean – all of which burn more oil. Fertilizer is made from natural gas. Of the grain and oilseeds grown, a larger and larger portion is going to the production of renewable fuels as mandates for ethanol and biodiesel come into effect.

Saudi Arabia made known that it would increase its own oil production in order to offset supply disruptions from Libya, and that news helped the oil market settle down a little bit. While Canada is a net oil exporter, the country doesn’t set world prices and escalating violence in North Africa and the Middle East has the potential to lead to more volatility in the energy markets, which would spill into the much smaller grains and oilseeds. Some analysts have pegged the US$120-per-barrel level for crude oil as a point that would send the U.S. back into a recession, so that could be a number to watch for going forward.

Gas and diesel prices are already rising at the pumps. A question now is whether the returns for agricultural commodities will keep up before the high energy costs cut too much into profitability.

Phil Franz-Warkentin and Brent Harder write for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

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Forthree-times-dailymarket reportsfromCommodityNews ServiceCanada,visitICE FuturesCanadaupdates”at www.manitobacooperator.ca.

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Phil Franz-Warkentin - MarketsFarm

Phil Franz-Warkentin writes for MarketsFarm specializing in grain and commodity market reporting.

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