Corn, crude oil fundamentals change

By | October 06, 2008
Sept. 22—The corn market has been volatile despite the upcoming harvest season. Outside influences have allowed that volatility to prosper whether due to the energy complex, the U.S. dollar, the financial crisis or the slowing world economy. Nonetheless, each component has complemented one another.

The September USDA supply and demand report indicated that there may be a problem with U.S. corn production. The yield was reduced by 2.7 bushels per acre (from 155 to 152.3), equating to a reduction of 216 million bushels compared with the last report, or down 1 billion bushels from one year ago. One thing to note is this will still be the second-highest yield in U.S. history.

U.S. demand for exports, food, seed and industrial use was unchanged. However, a reduction of 100 million bushels in feed demand was noted. Therefore, the U.S. carryout now rests unsettled at 1.2 billion bushels (an 8 percent carryout-to-use ratio). From a world perspective, wheat carryout increased by 3.73 million metric tons despite corn carryout being reduced by 2.44 million metric tons. The result is more wheat feeding around the globe.

The adjacent graph depicts crude oil and its relationship to corn. Will there be a disconnect between agricultural commodities and energies? The relationship between crude oil and corn has been 75 percent since 2007. Going back to 2003, that same correlation is 65 percent. The correlation between soybean oil and crude is 88 percent since 2007. Therefore, the market may have put corn fundamentals into play and may see that spread begin to uncorrelate.