“If you don’t think the economy is going to be in a substantial slowdown or recession, the prices are undervalued. If you do think we are going into a global slowdown, the prices have probably more room to fall,” Flynn explained.

“I lean more towards the fact that the market is overdone. We’re going to bottom out shortly,” he added, noting that he expects world supplies to tighten in 2024.

Until then, Flynn said the oil market was suffering from “high anxiety” due to the amount of volatility. One case in point was Saudi Arabia cutting its price for oil on Jan. 8, which saw values for Brent and West Texas Intermediate crude oils get hit hard.

In the same breath, he pointed to the risk to supplies that’s added some cost to oil. Namely the attacks on commercial shipping in the Red Sea being carried out by Iran-supported Houthi rebels in Yemen.

“But the reality is we haven’t seen any major oil disruptions. We haven’t lost too many barrels of oil because of this. Admittedly, [shipments] have been delayed around the Red Sea has added to the cost.

Flynn said there were widespread expectations the price of oil would have jumped with the start of the Gaza war and fears the conflict would spread throughout the Middle East. But such has not occurred so far.

He also pointed to the annual “rebalancing of the commodity index funds” with Bloomberg commodity index and the S&P Goldman Sachs index.

“When they rebalanced those indexes, they had to sell some oil. That put further downward pressure on prices,” Flynn said.

He said the hedge funds built a near-record short position in crude oil, which weighed on values.

“They’re betting on a recession. They keep selling in every rally in oil. They are doom and gloom, and they keep pushing the market lower,” Flynn commented.

“On the flip side of that, if they’re wrong, you can see a major reversal in price,” he added, noting colder temperatures will push up the demand for diesel and natural gas.

— Glen Hallick reports for MarketsFarm from Winnipeg. 

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Weather there will be a major factor on traders’ radar over the next few months, but larger financial and geopolitical issues will also be followed closely.

Interest rates

The U.S. Federal Reserve left its key overnight rate unchanged at 5.25 to 5.5 per cent in its Nov. 1 policy meeting, and its accompanying statements imply that it will likely hold steady again in December. However, many analysts still think the Fed will raise rates again in 2024 to bring inflation back where they want it.

While the U.S. lending rate remains at its highest level in 22 years and may get higher still, recent Canadian data suggests the Bank of Canada could keep to the sidelines in 2024 and could even cut rates, according to analysts.

The BoC has held its key overnight rate at five per cent during its past two policy meetings, and the latest gross domestic product data suggests the country could be nearing a recession.

Currency

If the U.S. keeps raising rates and Canada holds steady, the widening rate spread would benefit the U.S. dollar at the expense of the loonie. While a weaker Canadian currency is typically supportive for domestic grain prices, the broader global implications of a strong U.S. dollar could have the opposite effect on North American markets in general.

The Canadian dollar hit its weakest level of the past calendar year, relative to its U.S. counterpart, on Nov. 1 before bouncing off that low in the immediate aftermath of the Fed interest rate announcement.

The geopolitical risks brought on by the conflict between Israel and Hamas have created ‘risk-off’ sentiment in many global markets, which could weigh further on Canadian currency even if crude oil rises.

Crude oil

Oil prices have seen wide swings during the four weeks of the conflict in Gaza, with West Texas Intermediate holding between US$80-$90 per barrel. An escalation of the fighting beyond the small Palestinian enclave could have a serious impact on world energy markets, especially if attacks increase along Israel’s border with Lebanon.

Supplies are also set to tighten even without the conflict, but data out of China pointing to a slowdown in the country’s manufacturing sector could be a sign of declining demand.

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U.S. refining capacity has declined in the last two years, as plants shut during the outset of the coronavirus pandemic, causing prices to spike. Several plants are being converted to facilities that can produce cleaner-burning renewable diesel, but at least for now, those facilities will not fully replace those refined barrels.

There are at least 12 renewable diesel projects worth more than $9 billion under construction, with another nine proposed (all figures US$). The 12, along with existing plants, are expected to produce about 135,000 barrels per day (bpd) of renewable diesel by 2025 according to EIA data, from around 80,000 bpd now.

However, since 2019, diesel production capacity has dropped by about 180,000 bpd total, according to the U.S. Energy Information Administration, and at least one more U.S. refinery is set to close next year, further reducing output. In addition, those refiners set to produce renewable diesel will also no longer produce gasoline or jet fuel.

Globally, about 400,000 bpd of combined diesel, jet fuel and fuel oil capacity has been lost since 2019, according to calculations from EIA data.

Renewable diesel is made from animal fats, food wastes and plant oils but is chemically equivalent to petroleum-based diesel. It can be produced in existing refinery equipment, but the yield are lower than with diesel. Biodiesel, another plant based diesel, must be mixed with petroleum to operate effectively in engines.

Growing demand and refinery losses have pushed diesel prices to record levels. The retail price of U.S. diesel has surged 80 per cent this year to $5.78 a U.S. gallon, and low inventories have raised the potential for shortages. U.S. stocks of distillates, including diesel, are down 19 per cent from a year ago.

About 1 million bpd of new petroleum refining capacity is planned in the next five years in Asia, the Middle East and on the U.S. Gulf Coast. But experts say startups are difficult to predict due to construction delays, changes in market demand and financing.

Biodiesel pivot

U.S. refiners joined the renewable fuels bandwagon two years ago as the pandemic slashed fuel demand and environmental pressures led several to choose de-carbonizing over shuttering facilities.

Marathon Petroleum’s 166,000 bpd Martinez, California refinery and Phillips 66’s 120,200 bpd Rodeo refinery, also in California, converted to renewable diesel facilities. Combined, they will produce 100,000 bpd of renewable diesel by 2023.

HF Sinclair converted a 52,000-bpd Cheyenne, Wyoming, refinery to produce 6,000 bpd of renewable diesel. The former Come-by-Chance refinery in Newfoundland aims to begin producing 18,000 bpd of renewable fuels by 2024.

“These projects should bring incremental barrels in the next few years, but not now when they would be more needed,” said Ravi Ramdas, managing director of energy consultancy Peninsula Energy.

Renewable fuel profits have been bolstered by states, led by California’s Low Carbon Fuel Standard, that reward producers with tradable credits for producing renewable fuels.

However, the credits are now trading at about $80 per ton, down from $200 per ton in 2020, when the majority of these projects were proposed. Still, U.S. refiners say they are not backtracking on renewable diesel projects.

The cost of vegetable oils used to make renewable diesel also has shot up following Russia’s invasion of Ukraine. Soybean oil, a popular refinery feedstock, is up 40 per cent year-over-year, while crude oil is up more than than 60 per cent in that time.

— Laura Sanicola reports on the U.S. energy sector for Reuters from Washington, D.C.

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Wall Street tumbled as fears of economic damage intensified with the global tally of cases crossing 100,000. Financial markets view the virus, which causes a flu-like illness, as the catalyst that could interrupt the longest economic expansion on record, now in its 11th year.

Futures prices for corn, which is used to make ethanol, faced additional pressure from the their link to energy markets, traders said. Oil prices tanked over eight per cent and hit their lowest since mid-2017.

“The outside markets are causing a risk-off type of trade,” said Don Roose, president of Iowa-based agricultural broker U.S. Commodities. “There’s no doubt about it.”

The most actively traded corn futures contract lost 1.4 per cent to close at $3.76 a bushel at the Chicago Board of Trade (all figures US$). Soybeans slipped 0.8 per cent to $8.91-1/4 a bushel. The most-active wheat contract dropped one per cent to $5.15-3/4 a bushel at the CBOT.

Traders and analysts said prices could continue to weaken.

“We have virus fears back in the market and I think that it will get worse before it gets better,” said Ole Houe, director of advisory services at brokerage IKON Commodities.

The U.S. Department of Agriculture said on Friday it postponed a trade mission to Morocco because coronavirus was detected there.

More than 3,200 people worldwide have died from the respiratory illness. The Asian Development Bank said the outbreak is set to trim economic growth in developing Asia and around the world this year.

Traders are continuing to wait for China to ramp up purchases of U.S. agricultural goods, as it pledged to do in an initial trade deal signed in January.

China, the world’s top soybean importer, has granted tariff exemptions for some crushers to import U.S. soybeans, five sources told Reuters. However, Chinese importers are buying soybeans from Brazil, where prices are cheaper than in the United States, traders said.

“They’ve got these duty-free licenses, and so far it’s hands in their pockets,” Roose said.

China has also granted tariff exemptions for some importers to buy U.S. sorghum, wheat and distillers’ dried grains (DDGs), among other products, traders said.

The USDA reported that private exporters sold 234,688 tonnes of U.S. corn to Japan and 211,336 tonnes to unknown destinations.

The agency is set to release monthly supply and demand data on Tuesday.

— Reporting for Reuters by Tom Polansek in Chicago; additional reporting by Naveen Thukral in Singapore.

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As part of an effort to effect regime change in Venezuela, U.S. President Donald Trump announced this week he wants to place sanctions on the South American country’s oil industry.

The U.S. is at odds with Nicolas Maduro, who was recently sworn in for a second term as Venezuela’s president following elections that were deemed by the international community as fraudulent. The U.S. and several other countries, including Canada, recognized Juan Guaido, the leader of Venezuela’s National Assembly, as the country’s interim president.

The U.S. has long been a major importer of oil from Venezuela as its heavy crude is preferred for producing diesel fuel.

Should those sanctions take effect and as the U.S. looks to other sources for heavy crude, Canada will be at a disadvantage, according to Tom Koza of the Oil Price Information Service in New Jersey.

“You (Canada) got a lot of heavy oil, but you don’t have the logistics… to get it to the U.S. Gulf Coast,” Koza said, adding the railways should benefit from any increased crude oil exports to U.S. refineries.

And with those refineries demanding heavy crude he was still optimistic of Western Canadian Select crude oil making its way south in larger quantities.

Until the specifics of the sanctions are known, Gary Mar, president of the Petroleum Services Association of Canada, is skeptical of what might happen because of the U.S. president.

“Trump tweets without much regard for consequences or he changes his mind,” Mar stated.

He pointed to the U.S. sanctions on Iranian oil, which came with numerous waivers that to him made those sanctions rather meaningless. At this point it’s uncertain if Trump will include waivers on Venezuelan oil.

“That’s a political issue that’s hard to predict. The U.S. president often makes decisions without detailed advice being given to him,” Mar commented.

Of the 3.3 million barrels of oil a day Canada exports, he pointed out that approximately 10 per cent is by rail. Also the Province of Alberta’s plans to add enough rail cars to move another 120,000 barrels a day will take one to two years to implement.

Although Koza is confident that U.S. sanctions on Venezuelan oil “won’t be a global inflation event” there’s something else on the horizon that will drive up world diesel prices in about a year’s time regardless of where it was produced.

“Next year (the refineries) may not want a lot of heavy crude oil because it comes with a lot of sulphur. That high-sulphur fuel, which now goes into powering (ocean-going) vessels is going to be illegal to use in January 2020,” Koza said.

Until then consumers very likely won’t see any increases in diesel prices.

— Glen Hallick writes for MarketsFarm, a Glacier FarmMedia division specializing in grain and commodity market analysis and reporting.

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“We’re going to see volatility throughout the year obviously but when we look at that season, or the full year average, we’re looking for it to be right around that 75 cents,” said Craig Klemmer, principal agricultural economist at FCC.

FCC bases its prediction on oil price forecasts and interest rate spreads between the U.S. and Canada. Of late, oil has been on the upswing, due to production cuts from the Organization of Petroleum Exporting Countries (OPEC).

“On the downside of the oil side of the complex, the Canadian economy, economic growth, U.S. growth for the economy looks to be slowing down a little bit and that’s going to put some downward pressure as we move throughout the year,” Klemmer said.

The Bank of Canada has lowered its expectation for rate increases, and FCC forecasts for one to two rate increases this year. For the U.S., FCC also expects more rate increases, either two or three.

Global trade could also affect the dollar. When looking south of the border, Klemmer said, FCC pays close attention to the trade talks between the U.S. and China and what affect that could have on global trade.

“We’re going to continue to be monitoring how those relationships are through 2019. And we do see a thawing in that relationship and that’s going to help the markets out moving forward in 2019,” he said.

The Canadian dollar could also see some pressure from the rate of the growth of the U.S. and Canadian economies. FCC is expecting the U.S. economy to grow slightly faster than the Canadian economy, at two to 2.5 per cent.

In Canada, the Bank of Canada expects for inflation to hit its two per cent mid-point target.

When looking at agriculture specifically, the slightly weaker Canadian dollar should be good for the industry. Canada’s agriculture industry is export-driven, with most business done in U.S. dollars.

“That’s going to give us a little of a competitive advantage on the returns for our pork and beef exports, as well as our grain and oilseed and pulse exports, and those will help to improve, or help support Canadian agriculture,” Klemmer said.

— Ashley Robinson writes for Commodity News Service Canada, a Glacier FarmMedia company specializing in grain and commodity market reporting.

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“We think the market’s getting kind of overdone down here and this might be your best chance…if we do get a cold winter I think we’ll see these prices really pop,” said Phil Flynn of The Price Futures Group in Chicago, Ill.

Crude oil prices have been down lately. On Nov. 5 Brent crude closed at US$72.16 per barrel and West Texas Intermediate crude at US$62.52. Both oil benchmarks have slid more than 15 percent since hitting four-year highs in early October.

However, even with oil prices on the downswing, Flynn said there should be concern about diesel prices. Supply has been tightening globally, which could lead to a price spike.

“As of last week I think (the United States oil stocks were) five per cent below the five-year average and there’s a lot of concern that if we get a really cold winter it’s going to be difficult to meet that demand and get caught up,” he said.

China is also facing a tightening supply, according to Flynn. Latest news out of the country has the Chinese government telling the western provinces to ramp up purchases of diesel and heating fuel for the winter. China has faced supply shortages in the past and the government is trying to lower the chances of that happening again.

There have also been reports out of Russia that they are thinking of putting export duties on oil because they’re concerned about their distillate fuel supplies heading into the winter.

According to Flynn, this all leads to there being an overall bullish backdrop for diesel prices.

While gas prices have been lower than diesel prices lately on the Prairies, consumers shouldn’t be expecting diesel prices to come down, according to Flynn.

“If you look at the supplies of gasoline, they’re really above average for this time of year. Even though demand has been relatively strong, diesel fuel is below average and that’s why you’re seeing that discrepancy,” he said.

While the U.S. sanctions against Iran have been making news headlines in regards to oil prices, Flynn doesn’t think this has been affecting diesel markets much due to 180-day exemptions the U.S. has placed on eight importers who work with Iran.

“Right now the market seems to be dismissing those because of the waiver and I think one of the reasons they had to give waivers is because of the tightness of distillate,” Flynn said.

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The Pallister government this week announced fuels used to heat and cool livestock buildings and greenhouses and to dry grain would get a pass on the tax.

The sector successfully argued from the outset it needed these exemptions to remain globally competitive. As exporters that don’t set their own prices, farmers have no ability to pass these higher costs on.

While making the announcement, the province highlighted the importance of agriculture as one of the main economic drivers of the province. Dan Mazier, president of KAP, praised the government for listening to the concerns of the industry, saying the system worked.

Agriculture wasn’t alone in gaining exemptions. Commercial fishing, trapping, logging and even prospecting got a pass as well. Likewise hospitals and municipalities got limited exemptions for activities such as firefighting.

These exemptions come on top of exemptions for purple fuel that will avoid pump taxes that will hit gasoline at 5.32 cents/litre and diesel at 6.71 cents/litre, costing the average Manitoban about $125 a year at the pump.

Large-scale emitters such as the Koch plant in Brandon and the Vale smelter in Thompson have also received a pass on paying up until 2019, and then they’re promised a system of credits for trade.

Critics will likely deride these moves. Many proponents of a carbon price will fret that too many exemptions undermine any efforts to rein in the problem, making the policy meaningless in the end.

Such policies, especially when they’re not global, are always going to be a delicate balancing act between protecting the economy and the environment.

What shouldn’t go ignored here is the unsung benefit (and unheralded risk) of pursuing (or ignoring) increased efficiency.

Tony Blair, former prime minister of the United Kingdom, once observed he supported green policies to fight global warming because, if carefully implemented, they represented an opportunity to build a more resilient society and economy, one less subject to the vagaries of oil prices, for example.

Viewed through that lens, he suggested one of the greatest risks to an economy was inaction. It may give a sector a short-term advantage, but over time it would disadvantage that same sector, he argued. Competitors would become more efficient and able to do more with less.

With oil at $65 a barrel that wouldn’t be a huge advantage. But what about oil at $100 a barrel — or $150 or $200? As the price of those unavoidable inputs rises, the more efficient economies would be rewarded, Blair argued.

In essence, Blair was arguing that those trying to avoid economic risk were actually slowly and unwittingly accumulating more risk, by failing to take action.

Now that the clear and present danger of getting placed on an uneven playing field with global competitors has passed, the agriculture sector and the provincial government, should turn their thoughts to how to best avoid this portion of the metaphorical iceberg which remains below the surface.

How can the sector become more efficient and better prepared for the next inevitable spike in energy prices, for example? How can it build on its track record of success in things like reduced tillage? How can it encourage innovation and technological adoption that will lower costs and reduce inputs while keeping farms productive?

These are the challenges of both today and tomorrow and meeting them will be key to future success. It would be a mistake to heave a sigh of relief at the arrival of these exemptions and go back to business as usual, assuming change won’t come at a later date.

The need to use fossil fuels — and the products such as nitrogen made from them — more efficiently may arrive because of government policy.

Over time, more governments could sign on to these efforts, and exemptions like those being celebrated today may begin disappearing one by one.

Or it may arrive through good old supply-and-demand economics with energy use outstripping supply, leading to one of the price spikes for energy products we’ve all become too familiar with over the years.

Arrive, however, it will. And when that need arrives, Tony Blair may be right. The best-prepared economies could very well be the winners.

What’s needed now are policies and research funding that sets the stage for that. Government, public research institutions and the sector itself should keep this at the top of the agenda.

To do otherwise, is to risk being caught flat footed and ill prepared.

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And the latest consumer price index (CPI) report won’t calm Canadian shoppers any time soon, since food inflation stands at 4.1 per cent.

That’s a significant contrast to the -0.4 per cent in food inflation reported in the U.S. just a few days ago. With global food prices dropping to record lows, the Canadian economy over the past few months is an industrialized world anomaly.

Food inflation remains substantially higher than our overall inflation rate, forcing many consumers to make budgetary compromises to pay grocery bills.

The dollar is obviously a major piece of the story, but it is just one piece.

Climate change, and in particular droughts in some parts of California, has given Canadian importers grief. California’s close proximity cuts shipping costs, while offering higher levels of freshness and quality, for imported products. Canada imports billions in agricultural goods every year from the Golden State. However, farm gate price fluctuations have been unpredictable. Cauliflower prices have swung from $35 for a case of 12 to as high as $100 last November.

If products are unavailable in California or are too expensive, importers need to procure them elsewhere, even as far away as Europe. As a result, costs increase — for example, shipping costs can easily triple. Over the next few months, lettuce, strawberries, grapes, oranges, celery and, of course, cauliflower will likely be affected by broader influences. These items will all likely cost more — if they can be found at all.

In fact, Canadians should expect more shortages on the retail shelves over the next few weeks, and not because of limited supplies or diminished access. The recent cauliflower woes provide a lesson to Canadian food retailers on market-based hysteria. The food market has become increasingly fickle, financially capricious and hypersensitive to price fluctuations.

After a few weeks of shocking cauliflower prices, the story got major traction and that pushed consumers away. So cauliflower prices dropped dramatically, to $2.50 a head and, in some parts of the country, to as low as $1 a head. At such prices, most retailers are likely selling cauliflower at a loss.

The dramatic shift was essentially created by retailers’ fears of being saddled with excess inventories. Perishables must constantly move through the supply chain to reduce losses.

Importers and retailers know what the market can bear. A lower dollar and procurement challenges will most certainly push prices up in our market. Given what happened to cauliflower, most retailers will think twice before importing a product that requires a much higher price to bring a decent profit. If retail prices are considered too high, importers may turn away from a product, creating shortages on supermarket shelves. So until things calm down, we shouldn’t be surprised to see retailers being more careful with their purchasing practices.

In the meantime, slumping oil prices may offer the silver lining Canadians need to cope with higher grocery bills. Families with at least one car can save $1,000 to $1,500 a year on gas, based on current low prices. Since inflated food prices will cost the average family $345 more over the same period, lower pump prices will definitely help — particularly in an economy in which wages are barely budging.

If that’s not enough, getting more acquainted with grocery stores’ freezers can help consumers get the nutrients they need until spring arrives. And then we can look to Canadian farmers to bring more freshness to our kitchen tables.

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Traditionally, ethanol is cheaper than gasoline, which encouraged processors to blend more than the mandated amount, according to Andrea Kent, president of the Canadian Renewable Fuels Association (CRFA).

“When you look at low gasoline prices now, that price advantage for ethanol really really shrinks,” she said.

That means blenders will meet the mandated five per cent ethanol requirement, but have less incentive to blend at seven or 7.5 per cent, which they normally do when it’s financially advantageous, Kent said.

Biofuel production is a demand driver in the agricultural market, as corn is an ingredient in ethanol production, while soybeans are used in biodiesel, so reduced demand for biofuel trickles down to the agricultural sector.

“Biofuel production is obviously a big driver for corn, soybean and other grain markets,” Kent said.

“Amid lower oil prices you see that kind of low biofuel use can kind of trickle down and have an impact on the farm level as well.”

The impact of reduced opportunistic blending has been mitigated somewhat by policies that mandate a certain amount of biofuel use in Canadian fuels — five per cent for ethanol, and two per cent for biodiesel.

The CRFA is trying to get the mandated amount of biodiesel in diesel fuel up to five per cent by 2020.

— Jade Markus writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

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